10-K 1 v142902_10k.htm Unassociated Document


U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549

FORM 10-K

x           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2008
 
¨           TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _____________

Commission file number: 0-19276

FUSHI COPPERWELD, INC.
(Exact name of registrant as specified in its charter)

Nevada
13-3140715
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)

1 Shuang Qiang Road, Jinzhou, Dalian, Peoples Republic of China 116100
(Address of Principal Executive Offices, Including Zip Code)

Registrant’s telephone number:  (011)-86-411-8770-3333

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.006 Par Value

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes   ¨      No   x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes   ¨      No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days.  Yes x      No   ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of  “large accelerated filer,” “accelerated filer,” and smaller reporting companies in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨
Accelerated filer                   x
Non-accelerated filer   ¨
Smaller reporting company ¨
Do not check if a smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   ¨      No   x
 


 
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based upon the closing sale price of the registrant’s common stock as reported on the NASDAQ Global Market on March 13, 2008 was approximately $58,610,873.  Shares of common stock held by each officer and director and by each person who owns 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates.  

The number of outstanding shares of the registrant’s common stock on March 16, 2009 was 27,799,034.

  DOCUMENTS INCORPORATED BY REFERENCE

The definitive proxy statement for the registrant’s 2009 Annual Meeting of Stockholders to be held in May of 2009 is incorporated by reference in Part III to the extent described therein.



FORM 10-K ANNUAL REPORT
YEAR ENDED DECEMBER 31, 2008
 
 
TABLE OF CONTENTS

       
PAGE
         
PART I
       
Item 1.
 
Business
 
  1
Item 1A
 
Risk Factors
 
  14
Item 1B
 
Unresolved Staff Comments
 
  30
Item 2.
 
Properties
 
  30
Item 3.
 
Legal Proceedings
 
  31
Item 4.
 
Submission of Matters to a Vote of Security Holders
 
  32
         
PART II
       
Item 5.
 
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
  32
Item 6.
 
Selected Financial Data
 
  36
Item 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
  37
Item 7A.
 
Quantitative and Qualitative Disclosures about Market Risk
 
  53
Item 8.
 
Financial Statements and Supplementary Data
 
  55
Item 9.
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
  55
Item 9A.
 
Controls and Procedures
 
  55
Item 9B.
 
Other Information
 
  57
         
PART III
       
Item 10.
 
Directors, Executive Officers and Corporate Governance
 
  57
Item 11.
 
Executive Compensation
 
  57
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
  57
Item 13.
 
Certain Relationships and Related Transactions, and Director Independence
 
  57
Item 14.
 
Principal Accountant Fees and Services
 
  58
         
PART IV
       
Item 15.
 
Exhibits and Financial Statement Schedules
 
  58
         
SIGNATURES
 
59
EXHIBIT INDEX
 
E-1
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
F-1
 

 
PART I


FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK

Certain statements in this Report, and the documents incorporated by reference herein, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include statements, which involve risks and uncertainties, regarding, among other things, (a) our projected sales, profitability, and cash flows, (b) our growth strategies, (c) anticipated trends in our industries, (d) our future financing plans, and (e) our anticipated needs for, and use of, working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,” “potential,” “project,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend,” or the negative of these words or other variations on these words or comparable terminology. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” as well as in this Report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” and matters described in this report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements.

The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
 
Unless otherwise noted, all currency figures in this filing are in U.S. dollars. References to "yuan" or "RMB" are to the Chinese yuan (also known as the renminbi). According to the Federal Reserve Bank, http://www.ny.frb.org/, as of December 31, 2008, US $1.00 =6.8225 yuan (or 1 yuan = US$ 0.14657).
 
The "Company", "we," "us," "our," and the "Registrant" refer to (i) Fushi Copperweld, Inc. (formerly Fushi International, Inc.), (ii) Fushi Holdings, Inc. (formerly Diversified Product Inspections, Inc.) (“Fushi Holdings”), (iii) Fushi International (Dalian) Bimetallic Cable Co., Ltd. (formerly Dalian Diversified Product Inspections Bimetallic Cable, Co., Ltd.) (“Fushi International (Dalian)”), (iv) Dalian Fushi Bimetallic Wire Manufacturing, Co., Ltd. (“Dalian Fushi”), (v) Copperweld Holdings, LLC, (vi) Copperweld Bimetallic, LLC (“Copperweld”), (vii) Copperweld Bimetallics UK, LLC, and (viii) Copperweld International Holdings, LLC.

PART I

ITEM 1.           DESCRIPTION OF BUSINESS

 
Fushi Copperweld, Inc. is the global leader in developing, designing, manufacturing, marketing, and distributing bimetallic wire products, principally copper-clad aluminum and copper-clad steel. Our products are primarily focused on serving end-user applications in the telecommunication, electrical utility, and transportation (including automotive) markets.  Our products are engineered conductors, rather than commodity products, that offer favorable end-use characteristics.  These characteristics include one or more of the following: weight savings, increased flexibility of end-products, increased tensile strength, increased theft resistance, and equivalent RF resistance qualities, when compared to solid copper or solid aluminum conductors. We add value through innovative design and engineering, excellence in manufacturing, superior product quality, and our commitment to the highest level of customer service.  With the exception of utility grounding and distribution applications, the majority of our finished products become components of a wide variety of end-use products.  Bimetallic products offer weight, strength and economic advantages as a replacement for solid copper in our targeted applications.

The People’s Republic of China (“PRC”) is the largest market for our products; however, we are a worldwide provider. During 2008, we shipped 37,291 metric tons of bimetallic products to over 300 customers in 38 countries.

1

 
Our History
We were incorporated as a Nevada company on October 6, 1982 under the name M, Inc. We changed our corporate name to Parallel Technologies, Inc. in June 1991. We were formed as a "blank check" entity for the purpose of seeking a merger, acquisition or other business combination transaction with a privately-owned entity seeking to become a publicly-owned entity. In a series of restructuring transactions which began in 2005 and were completed in 2006 (the “Restructuring”), we acquired Fushi Holdings, Inc., incorporated in the state of Delaware, which is a holding company for Fushi International (Dalian) Bimetallic Cable Co., Ltd(“Fushi International (Dalian)”), organized under the laws of the People’s Republic of China (PRC). As a result of the restructuring transactions, Fushi International (Dalian) acquired substantially all of the manufacturing assets and business and controls the remaining assets and financial affairs of Dalian Fushi Bimetallic Manufacturing Co., Ltd (“Dalian Fushi”). Dalian Fushi is a limited liability company organized under the laws of the PRC, which is engaged in the manufacture and sale of bimetallic wire products. Following the restructuring, Dalian Fushi became a non-operating entity. The Restructuring is more fully described in our Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on December 14, 2005.
 
On September 25, 2007 Fushi International entered into an LLC Membership Interest Purchase Agreement (the “Purchase Agreement”) to acquire Copperweld Holdings, LLC, a limited liability company incorporated in the state of North Carolina and the sole member of Copperweld Bimetallics, LLC, a limited liability company incorporated in the state of Delaware (“Copperweld”) and all of the issued and outstanding membership interest of International Manufacturing Equipment Suppliers, LLC (“IMES”). Copperweld is the parent company of Copperweld Bimetallics UK, LLC, a limited liability company registered in the United Kingdom and Copperweld International Holdings, LLC, a limited liability company incorporated in the state of North Carolina. We closed on the purchase agreement as of the beginning of business on October 29, 2007 with all of the Copperweld entities and IMES becoming subsidiaries of Fushi International Inc.

Effective January 15, 2008, we changed our name from Fushi International, Inc. to Fushi Copperweld, Inc. to recognize the worldwide importance of the Copperweld brand while continuing to leverage the Fushi brand, especially in the PRC. We, and our customers, view the Copperweld brand as the premium brand of bimetallic products and will promote the Copperweld brand as a premier product, worldwide.

On June 20, 2008, Copperweld Holdings, LLC was dissolved and its membership interest in Copperweld Bimetallics, LLC was transferred to Fushi Copperweld, Inc.  Copperweld Holdings, LLC was a shell entity and its only asset was its membership interest in Copperweld Bimetallics, LLC.  On August 27, 2008, Copperweld International Holdings, LLC and International Manufacturing Equipment Suppliers, LLC, both shell entities without assets or liabilities, were dissolved.

Our Corporate Structure
 
The following diagram shows the structure of our company from an operating perspective. The top management functions reside at the Fushi Copperweld level with executive management, operations management, sales management and financial management functioning at this level.  The PRC manufacturing, while managed at the corporate level, functions through Fushi Holdings, Fushi International (Dalian) and Dalian Fushi. The US and United Kingdom manufacturing occurs through Copperweld and report to an executive at the Fushi Copperweld level.
 
2

 
 
The functions of each location are clearly defined with information reporting occurring for each entity. To facilitate management of the various operations, we upgraded our Dalian accounting software provided by UFIDA Software Co., Ltd. during 2008. We employ an Enterprise Resource Planning (“ERP”) system and a Manufacturing Execution System (“MES”) in Fayetteville and we are implementing portions of the system in Dalian during 2009. Once fully installed, the system will provide management with information that will allow us to further improve efficiencies of our operations through more effective management of our resources.

Business Operations

Fushi International (Dalian)

Through our wholly owned operating subsidiary Fushi International (Dalian), we are engaged in developing, designing, manufacturing, marketing and distributing copper cladded bi-metallic engineered conductor products, principally copper-clad aluminum wires (“CCA”). Our Dalian facility operated by Fushi International (Dalian) primarily services the Asia-Pacific region, specifically the PRC market. Through our CCA products, we believe that we are the leading provider of bimetallic wire in terms of quality, capacity, and products sold in the PRC market. We view the PRC as the fastest growing market for bimetallic wire worldwide and we expect to see our growth within the PRC continue due to organic expansion of our PRC business to assist in meeting the Chinese government’s commitment to build infrastructure, the continuing development of telecom within the PRC and the opportunities within the utility market.

3

 
In the first quarter of 2008, we expanded our product offerings and production capabilities in the PRC through the transfer of higher capacity CCA machinery which utilizes Copperweld’s superior cladding technology to our Dalian facility. In 2009, we expect to further expand our production capabilities in Dalian through additional CCA machinery and the introduction of large scale copper-clad steel (“CCS”) production capacity. Adding CCS manufacturing to our Dalian facility will increase opportunities for utility grounding sales, electrified railway applications, and CATV products.

Within the PRC, telecommunication applications currently serve as the largest market for bimetallic wire. We expect demand to remain strong and for this market to continue its growth patterns.  Our expectation is based on the belief that the PRC’s leading telecom providers will continue to see strong growth of broadband and mobile subscribers, both of which are key drivers for investment into telecommunication infrastructure.  According to Ministry of Industry and Information Technology, the mobile and broadband penetration rates in the PRC are 48.5% and 20.5%, respectively. The PRC has lower penetration levels for broadband and mobile subscribers than developed countries in North America and Europe and we believe the PRC’s telecommunication carriers will maintain their strong investment for telecommunication related infrastructure build out in 2009 as the subscriber base grows.  According to the Minister of Information, total broadband subscribers in the PRC grew approximately 25.6% for full-year 2008. Furthermore, China Mobile, China Unicom and China Telecom recently announced that they will spend RMB 400 billion over the course of 2009, 2010, and 2011 to build out the PRC’s Third Generation (“3G”) and mobile networks. According to the Ministry of Industry and Information Technology, China Mobile plans to spend RMB 58.8 billion in 2009 to build approximately 60,000 base stations and China Unicom and China Telecom will each spend approximately RMB 30 billion in 2009 to develop their WCDMA and CDMA 2000 networks, respectively.

We believe that the electrical utility market for bimetallics in the PRC is underdeveloped relative to other markets worldwide and could serve as an area of significant growth for our Dalian facility. Our expectation is based on the response by the two largest power grid operators, State Grid Corporation (SGCC) and China Southern Grid (SGC), to widespread blackouts and power shortages experienced in the PRC between 2002 and 2005. According to strategy laid out by SGCC and SGC for the Eleventh Five Year Plan, they plan to spend RMB 1,200 billion in total transmission and distribution (“T&D”) capital expenditures over a five year time period beginning in 2007. Additionally, the PRC’s recent USD $586 billion stimulus package earmarks additional funds for the build out of the national T&D grid. As we expand our product offering from our Dalian facility to include CCS and continue to develop our CCA power cable and flat wire technologies for use in low and mid-voltage T&D components, we expect to enter into additional electrical utility markets. For example, we view CCS as an ideal substitute to copper for use in grounding and electrified railway applications due its lower cost and superior strength.

Copperweld

Copperweld operates two manufacturing facilities in Fayetteville, Tennessee and Telford, England. Through these facilities we are engaged in developing, designing, manufacturing, marketing and distributing copper-cladded bimetallic engineered conductor products, principally CCA and CCS. We believe that through our operations at these two facilities our Copperweld subsidiary is the leading provider of bimetallic wire in the North American, European, Middle Eastern and North African markets.

Copperweld’s Fayetteville plant will continue to produce CCA and CCS for the growing demand in the Americas, European, Middle Eastern and African markets where we believe there to be strong growth opportunities in the electrical utility markets.

We have added additional product capabilities to our Fayetteville facility in anticipation of demand and to further our ability to provide products to end-users for battery/booster cables, automotive applications such as wiring harnesses and white goods. The new equipment allows us to draw CCA to smaller diameters and new bunching equipment will allow us to provide a wide range of configurations.

The consumer goods market is driven by both the high price of copper and by the advantages of bimetallic technology. Copperweld is working with several suppliers to appliance manufacturers and with United Laboratories to gain product approvals. Despite the decline in copper prices over the last two quarters of 2008, we believe that our products continue to provide customers with an economic incentive to convert from copper to CCA. The addition of drawing and bunching equipment will provide Copperweld with the ability to provide bulk cable to the white goods market.

4

 
Similarly, our recent addition of stranding equipment in Fayetteville will provide our Copperweld subsidiary with the ability to provide additional products to the utility market, a market where Copperweld is the dominant supplier of CCS. The additional stranding equipment will bring us closer to the customer and reduce delivery times as we bring in-house value-added product enhancements.

We started work on the above projects commencing December 2007. We purchased additional equipment for our Fayetteville plant that will enable us to expand our finishing capabilities of our products. We expect the additional stranding capacity to be commissioned and in production by March 2009 and although we are now able to produce fine wire CCA bunched products, this project won’t be fully completed until the end of the 2nd quarter 2009. All components are purchased; however we still have to complete the installation of a new Frigerio break down machine, which will supply the feedstock to this cell. We anticipate the equipment to add increased value to our products and immediately improve margins seen at our Fayetteville plant by removing third party processors from between us and our end-user customers.

We expect demand for bimetallic wire with diameters of less than 0.25 mm to continue to increase worldwide. We plan to supply smaller diameter wire from our Dalian facility which is better equipped to produce this product cost effectively because it is a more labor intensive product. As we further integrate the combined Company, we also expect to shift supply from Copperweld’s customers located in the Asia-Pacific geographic region to our Dalian facility to provide more efficient service and delivery.
 
Our Telford facility provides manufacturing, sales and service to our European, Middle East and African customers. The facility has drawing, stranding and extrusion equipment that produces bimetallic products for a wide range of markets. The CCA and CCS originates primarily from Fayetteville and is imported and finished to customer specifications. Telford’s finishing capabilities are unique to the Company and provide higher value added products

Financial Information About Geographic Areas

See Note 2 to the Consolidated Financial Statements included in this Annual Report on Form 10-K for a breakdown of our sales by region for the fiscal years ended December 31, 2008, 2007 and 2006.  The below table provides a breakdown of our long-lived assets by region for the fiscal years ended December 31, 2008, 2007 and 2006.

   
Year ended December 31
 
(in millions)
 
2008
   
2007
   
2006
 
Total assets:
                 
P.R.C.
  $ 119.7     $ 101.4     $ 62.9  
North American and Europe
    28.4       20.4    
-
 
Total
  $ 148.1     $ 121.8     $ 62.9  
 
Our Products

We are engaged in the manufacture and sale of bimetallic wire, principally copper-clad aluminum (“CCA”) and copper-clad steel (“CCS”).  CCA and CCS are bimetallic products that have a copper strip formed around and bonded to a solid core of aluminum or steel.

CCA combines the conductivity and corrosion resistance of copper with the light weight and relatively low cost of aluminum. It is more robust than an aluminum conductor. Easy to handle and install, CCA is widely used in applications requiring the conductivity of copper while retaining the light weight advantages of aluminum.  Because television and networks have high frequency transmission signals and the high frequency signals are transmitted on the surface layer of a wire, CCA is an ideal inner conductor for trunk and distribution cables for the cable TV industry and for cables used in the cellular phone industry.

5

 
Our copper-clad steel (CCS) is an ideal substitute for solid copper, and is recognized around the world through its trademarked name, Copperweld®.  Copperweld® combines the strength of steel with the conductivity of copper, offering increased strength in comparison to solid copper.  The signal carrying capability of copper combined with the high resistance of steel, which decreases feedback and thus enhances signal quality, makes CCS the center conductor of choice in telecommunications.  CCS is widely used in utility applications and has been introduced into automotive applications. Copperweld® is available in a variety of sizes, conductivities and strengths to meet the requirements of the most demanding customer. Our CCS delivers outstanding reliability and value relative to solid copper.

Our copper-clad products offer superior value compared to copper and are increasingly utilized as customers look to add features while retaining the conductivity of copper, especially in light of increasing copper costs during early 2008. The applications base for CCA and CCS as substitutes and/or improvements over solid copper is expanding to an ever-growing variety of end-user applications on a worldwide basis.  Products manufactured by our facilities are typically used in the following products:

 
·
Telecommunications products – Due primarily to the signal carrying capabilities of copper at the surface of the center conductor, bimetallic wire is a standard center conductor for telecommunication applications. The primary products in this grouping include coaxial cables for CATV, trunk and distribution cables, cables for the cellular industry and telephony drop cable. We believe that we are the leading supplier of bimetallic wire for telecommunication cables in the Asia-Pacific, the Americas and Europe.

 
·
Utility products – Our CCA and CCS products are used for grounding applications and in power cables, transformer windings and tracer wire.  We produce single end, three wire, seven wire and 19 wire strand constructions and hybrid cables that utilize a combination of CCA, CCS and copper wires that are used in these products.

 
·
Transportation products – Our CCA and CCS wires are used in wiring harnesses for automobiles, trucks, motorcycles, commercial off road equipment and trailers.  We also provide bimetallic wire for aftermarket applications such as booster cables.  Automotive wiring harnesses include a variety of energy or control signal applications. Stranded CCS configurations are used in component wires for overhead wire in electrified railways.

The Bimetallic Industry

We market and sell our products directly to end-user manufacturers, and through distribution, both typically within the wire and cable industry. The bimetallic wire industry can be characterized as fast-growing on a worldwide basis and increasingly competitive, specifically in China where there is considerable fragmentation; however, beginning in the Second Quarter 2008 and continuing throughout 2008, an economic slowdown in the United States and slowing growth in certain European markets resulted in lower demand as compared to 2007. The slowdown in North America and Europe also affected wire and cable manufacturers within the PRC who relied heavily on exports to these markets for business.

A significant barrier to entry into this industry is technology, specifically in respect to cladding technologies. Cladding processes are typically proprietary in nature and have a direct impact on quality of the product, which is largely dependent on the characteristics of the bond between the differing metals. For many product offerings, there is significant differentiation among industry participants from a manufacturing, technological and quality standpoint.

Copper wires have historically been the dominant product for use in the wire and cable manufacturing industry due to its electrical conductivity and corrosion resistance; however, end-user manufacturers in the industry have increasingly pursued and considered alternative technologies such as bimetallics due performance and economic considerations. Relative to traditional copper wires, we believe that bimetallic wires offer greater value to end-users through its lower weight, increased tensile strength, extended life, theft deterrence and lower prices while still retaining the corrosion resistance and conductivity needs of the end-user. Because of the benefits of bimetallic wire, we believe there are substantial opportunities to capture increased market share in applications that have historically been largely dominated by solid copper wire. As the worldwide leader in bimetallic manufacturing, we possess superior cladding technologies, production capabilities, product offerings and distribution channels, which makes us well positioned to capitalize on the growing bimetallic demand worldwide.

6

 
The bimetallic wire industry is raw materials intensive with copper, aluminum and steel comprising the major cost components for products. Changes in the cost of raw materials are generally passed through to the customer, although there can be timing delays of varying lengths depending on the volatility in metal prices, the type of product, and competitive conditions.

Manufacturing Process
 
Manufacturing copper-clad products involves bonding copper strip to an aluminum or steel core, drawing the clad product to a finished diameter and heat treating as necessary depending upon the customer’s specifications. We use proprietary technologies developed in Dalian and Fayetteville.  We also own the worldwide rights to other technologies. These proprietary technologies allow us to produce superior copper-clad products compared to other producers. The Copperweld acquisition has allowed us to share technology between our manufacturing locations.  We have and will continue to integrate our technologies and equipment so we can better serve our customers from the location that offers the most cost effective and efficient means. Our technology base allows us to produce superior products, our combined research and development department supports continuing development and the geographical spread of our manufacturing locations improves our ability to provide superior service to our international customer base.

Research and Development

We are dedicated to improving our current products and to developing new technologies and products that will improve the performance and capabilities of bimetallic materials and allow entry into new markets. Because of our research and development ("R&D") initiatives in Dalian, we are recognized by the Dalian Municipal Government as a "new and high-technology" enterprise and have been receiving governmental funding or subsidies for our operations and R&D activities. Complimentary to our internal R&D initiatives, we also have ongoing partnerships with the University of Alabama and the Shanghai Electric Cable Research Institute (“SECRI”) to advance development of new products and production methods. Furthermore, in November 2007, we were appointed to the Copper-Clad Aluminum Executive Standards committee by the National Standardization Administration of China. As part of the Copper-Clad Aluminum Executive Committee, we assisted in drafting China’s first-ever nationwide standards for copper-clad aluminum wire and are now waiting for the standard issuing.
 
Quality Control
 
Our quality control begins with our ordering process because we believe that to produce quality products we must use high quality raw materials.  We provide our suppliers with our required specifications that apply to each category of raw material that we use.  When the raw materials arrive, our quality inspectors inspect each shipment for critical factors. During the manufacturing process, every employee has the responsibility and authority to identify non-conforming material or any material that shows manufacturing imperfections.  Inspectors test our products during and after all of the manufacturing processes.

In our final inspection process, we complete additional testing to insure the customer receives what he has ordered.  Additional testing in our laboratories includes breaking load, elongation, torsions, conductivity and the uniformity of the copper surface depending on the product and the individual customer’s requirements. We follow ISO guidelines in our process and in maintaining our testing equipment.

7

 
Warranties
 
We typically warrant all of our products and provide replacement or credit to our customers who are not satisfied with our products for a period of one year from the date of shipment. When we receive an indication that a product did not perform as expected, our quality control specialist and laboratory personnel test the product to determine if our process was correct for the specifications submitted by the customer and if the manufacturing process was completed as planned.  If we failed to produce the product according to the customer’s specifications or if the manufacturing process was flawed, we provide immediate credit to the customer. If we produced the product to the customer’s specifications and if the manufacturing process was not flawed, we send a team to the customer’s facilities to see if we can assist the customer in correcting its process.  Typically a team consists of at least one engineer, at least one experienced production person and the customer’s sales representative.  If the product was manufactured to the proper specifications, our team works with the customer in developing corrective action to solve their problem.
 
We have not established reserve funds for potential customer claims because, historically, we have not experienced significant customer complaints about our products. We believe that our customer support teams, our quality assurance and manufacturing monitoring procedures will continue to keep claims at a level that does not support a need for a reserve. We review customer returns on a monthly basis and should the need ever arise, may establish a reserve fund as we expand our business by volume and products. If we were to experience a significant increase in warranty claims, our financial results could be adversely affected. See "Risk Factors - Risks Related to Our Business - We do not maintain a reserve fund for warranty or defective products claims. Our costs could substantially increase if we experience a significant number of warranty claims."
 
Raw Materials and Suppliers

Our principal raw materials consist of aluminum and steel rods and copper strips, which collectively accounted for approximately 84.8% of our costs of goods sold during the fiscal year ended December 31, 2008.  Changes in the prices of copper, which has an established history of volatility, directly affect the prices of our products and may influence the demand for our products. The daily selling price of copper on the COMEX averaged $3.13 per pound for 2008, a decrease of 2.8% from the average of $3.22 per pound for 2007. Particularly, the average price of copper on the COMEX dropped sharply in the last quarter of 2008 to $1.75 per pound, after averaging $3.59 per pound for the first three quarters, an increase of 10.6% over the same period in 2007.  Copper, steel and aluminum are available in the market and we have not experienced shortages even in the current tough economic climate.  We are constantly reviewing sources for raw materials to prevent shortages of these materials as we expand our business.  During 2008, copper represented 55.6% of our raw material purchases, aluminum 38.7% and steel 5.7%, respectively.
 
For the fiscal year 2008 our top five suppliers accounted for 65% of our raw material supply compared to 38.6% in 2007.  Our acquisition of Copperweld made additional suppliers in different parts of the world available to us so we believe that we will continue to reduce our dependence on only a few suppliers in future periods.  We are in the process of integrating and restructuring our operations in an effort to streamline corporate resources and improve internal efficiency, with a particular focus on manufacturing and sales.

We purchase most of our raw materials at prevailing market prices. We do not have formal long-term purchase contracts with our suppliers and, therefore, we are exposed to the risk of fluctuating raw material prices. Our raw material price risk is mitigated because we generally attempt to pass changes in raw material costs to our customers. See "Risk Factors - Risks Related to Our Business- We depend on a few suppliers for a significant portion of our principal raw materials and we do not have any long-term supply contracts with our raw materials suppliers. Interruptions of production at our key suppliers may affect our results of operations and financial performance."
 
In addition to these short-term purchase contracts, we also purchase from our primary suppliers or other suppliers to satisfy additional raw materials needs from additional orders we did not previously project. Due to fluctuating worldwide supply and demand for our principal raw materials, we cannot guarantee that necessary materials will continue to be procured at the prices currently available or that are acceptable to our customers.  However, prices adversely affecting the supply and prices of our raw materials have an equal or greater adverse effect on producers of alternatives to our bimetallic products. We maintain multiple suppliers for each type of raw material that we use and monitor the availability of additional suppliers so that we have access to sufficient raw material sources necessary to meet customer demand.  Notwithstanding our supply availability practices, we do not have a guarantee that raw material availability will meet our demands. To the extent that our suppliers are not able to provide raw materials in sufficient quantity and quality on a timely and cost-efficient basis, our results of operations could be adversely impacted until we find other qualified suppliers.

8

 
Our increasing economies of scale as we streamline the procurement process at the corporate level will enable us to purchase materials in large volumes, offering us leverage to secure better pricing, and to a lesser degree, increasing the extent to which our suppliers rely on our purchase orders.  We believe this relationship of mutual reliance will enable us to reduce our exposure to possible price fluctuations.
  
Payment terms vary with each supplier. Some suppliers require payment prior to shipment, others offer varying terms from three to 30 days following shipment.  Demand for raw material in the PRC often requires that we prepay for our raw materials.  Price is often affected by our payment terms; therefore, we typically agree to shorter terms in exchange for reduced pricing for our raw materials.

Customers
 
Our products' target markets are manufacturers of finished wire, cable products and installers of equipment and systems which require conductive materials.  We also utilize distributors for targeted markets and products. In most cases, our customers incorporate our products into end-products that they subsequently supply to their customers. The products we manufacture are used by these end-product makers as standard components, materials or parts that are built to their specifications. Therefore, our business is driven, in part, by the strength, growth prospects and activity in the end-markets in which our products are used. Our technical and sales staff frequently provides technical and sales support to our customers.
 
We do not have long-term purchase commitments from our customers and the term of our sales contracts with our customers varies from 15 days to one year.  Furthermore, these contracts normally leave certain major terms such as price and quantity of products open to be determined in each purchase order.  These contracts also allow customers to re-adjust the contract price to reflect substantial changes in market conditions such as significant raw material price movements.

We have a large customer base, with approximately 300 customers in 38 countries around the world. The geographic dispersion and large number of customers provide a diverse base of revenue sources that we believe provide additional insulation to slowing economic conditions in selected regions. As a result of our large and diverse customer base our largest customers account for an increasingly smaller, but healthy, percentage of net sales compared to past fiscal years. Our top five customers represented 18.2% and 24.6% of our net sales during the fiscal years ended December 31, 2008 and 2007, respectively on a pro forma basis. Further, we anticipate that our overall customer composition and the concentration of our top customers will change as we expand our business and shift our product portfolio to higher-margin products; however, we can give no assurance that this will be the case.
 
The following table sets forth our ten largest customers in fiscal 2008:

Originating Office
 
2008 Sales in USD
   
Percentage of Total Sales
 
Dalian
    10,077,574       4.55 %
Fayetteville
    8,682,315       3.92 %
Fayetteville
    8,545,835       3.86 %
Dalian
    6,713,586       3.03 %
Dalian
    6,270,735       2.83 %
Dalian
    6,133,967       2.77 %
Dalian
    5,275,169       2.38 %
Fayetteville
    4,858,052       2.19 %
Dalian
    4,784,115       2.16 %
Dalian
    4,294,241       1.94 %
Total
    65,635,589       29.63 %

Marketing, Sales and Distribution
 
Our sales and marketing is a global operation. We market and sell our products through our direct sales force. In some countries we use sales agents or distributors to provide assistance with or lead our sales and distribution in selected countries.

9

 
Since the acquisition of Copperweld, we have begun integrating our sales and marketing functions on a global basis under the direction of a global sales manager.  Our extensive sales and service network covers a total of 38 countries.  A majority of the sales from our Dalian Sales and Marketing Department, consisting of 13 people, are made to PRC customers. There are five outside direct sales representatives working from the Fayetteville and Telford offices supported by four customer service representatives in addition to the global sales manager.  We offer different price incentives to encourage large-volume and long-term customers.  As a result of increasing demand for our products and as new marketing opportunities develop, we expect to increase our outside sales force by reassigning current employees and through adding additional qualified personnel, particularly in strategically significant areas such as South East Asia.  Our sales staff works closely with our customers to understand their needs and provide feedback to us so that we can better address their needs and improve the quality and features of our products. Throughout 2008 and continuing into the 2009 year, we provided professional sales training to our sales force.

As an important component of our marketing activities, we attended industry-specific conferences and exhibitions to promote our products and brand name.  We also advertised in industry journals and magazines and marketed our products on the Internet.  For example, in April 2008, we participated in “Wire Dusseldorf”” exhibitions in Dusseldorf, Germany, and in October 2008, we participated in the “Wire China 2008,” the largest biannual industry exhibition in China. We believe these activities are conducive in promoting our products and brand name among key industry participants.

Product Delivery and Risk of Loss
 
We usually deliver our products to our customers' place of business, while in some cases customers make their own delivery arrangements. Our Shipping Departments arrange for all deliveries regardless of the delivery method.  In Dalian we have four heavy trucks and eight contracted drivers that allow us to ship up to 30 tons per day and also utilize common carriers. In Fayetteville and Telford, we use common carriers.  International shipments are arranged through several ocean freight forwarding companies.
 
We include shipping expenses in the purchase price of our products or as separately stated charges.  In either instance delivery costs are ultimately borne by our customers. In addition, some orders require us to purchase freight insurance on behalf of a customer in which case the cost of such freight insurance is included in the purchase price of the products.
 
Insurance
 
Product Liability Insurance

We currently do not carry product liability or other similar insurance to cover products made and shipped. While historically product liability lawsuits against the Company have been rare and we have never experienced significant failures of our products, we cannot give any assurance that we will not have exposure for liability in the event of the failure of any of our products in the future. See “Risk Factors – Risks Related  to our Business – We do not presently maintain product liability insurance in the PRC, and our property and equipment insurance does not cover the full value of our property and equipment, which leaves us with exposure in the event of loss or damage to our properties or claims filed against us.”
 
Property Insurance and Other Insurance

We maintain property and casualty insurance coverage consistent with local rules and best practices in the PRC, Fayetteville, TN and Telford, England.  We use different insurers in each location and solicit competitive bids on a regular basis.  We believe that we are adequately protected with an appropriate level of insurance coverage from normally anticipated events.  We remain aware of replacement values

10


Seasonality

Historically, our revenues were not materially impacted by seasonal variations. In the first several years of our operation, due to limited manufacturing capacity and demand that outstripped capacity, seasonality was minimal.  After the increase of our manufacturing capacities and acquisition of Copperweld, we experienced certain quarterly fluctuations in revenues due to changing and expanding customer demands from different markets.  Sales volumes out of Fayetteville, which primarily serves the North American and European markets,  are generally lower in our fourth and first quarters, due primarily to cold weather related reduction in demand for construction related products and shutdown of our facility during the year-end holidays. Additionally, the PRC historically experiences a slowdown in demand during our first quarter due to the Chinese New Year holiday. We expect these variations to continue in the future and thus, we believe it is more meaningful to focus on annual rather than interim results.
 
Competition
 
Competition in the bimetallic industry, particularly in the PRC, can be characterized by rapid growth and a concentration of manufacturers, primarily due to an accelerated replacement of copper by bimetallic products applications.  The most significant factors that affect our competitive position are:
 
·
the performance and cost effectiveness of our products relative to those of our competitors;

·
our ability to manufacture and deliver products in required volumes, on a timely basis and at competitive prices;
 
·
the superior quality and reliability of our products;
 
·
our customer support capabilities, both from an engineering and operational perspective;  
 
·
excellence and flexibility in operations;
 
·
world leader in bimetallic products;
 
·
effectiveness of customer service and our ability to send experienced operators and engineers as well as a seasoned sales force to assist our customers; and
 
·
overall management capability.
 
We believe that we can differentiate ourselves by offering superior product quality, timely delivery, and better value. See "Risk Factors - Risks Related to Our Business — We may encounter substantial competition in our business and our failure to compete effectively may adversely affect our ability to generate revenue."
 
Our goal is to maintain our position as the worldwide leader in the bimetallic industry. Set forth below are our measures and strategies:  

·
 Manufacturing. By improving our production ability and enhancing equipment management, optimizing the process and products structure, perfecting the supplier system and cutting production cost, we will strive to maintain and expand our profit margins.
 
·
Research and Development. With the addition of the Fayetteville R&D department and the consolidation of our research and development capabilities we are well positioned to improve our existing products and to develop new applications for our customers and potential customers. We will continue to expand our association with the various universities and organizations who promote and support research into bimetallic technologies.

·
Domestic and International Expansion. We are a global company and as such we will continue to seek opportunities all around the globe in addition to continuing to expand our presence in our existing markets.

·
Raw Materials. We mitigate the risk of increases in raw material price volatility by passing changes in raw material prices through to our customers. We mitigate volatile supplies through effective planning, working closely with key suppliers to obtain the best possible supply schedules and delivery terms.
 
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·
Acquisitions/ Strategic Alliance. We remain aware of opportunities that develop where we have opportunities to add to our product mix and global strategies that will increase shareholder value.

Intellectual Property
 
Our principal intellectual property rights are our patents, patent application and the trademarks "FUSHI" and “Copperweld”. Additionally we have acquired the rights to superior processes that can be renewed when they expire in 2015. We continue to improve the products for which we hold the rights and through our research department, we anticipate continuing our development of proprietary intellectual properties. We employ the services of a law firm to maintain our trademark registrations throughout the world and to identify any potential infringements on our trademarks or our patents.
 
Domain Names. We own and operate websites, under the internet domain names www.fushiinternational.com, www.fushiinternational.cn, www.copperweld.com, www.copperweldbimetallic.com, and www.fushicopperweld.com. We pay an annual fee to maintain our registrations and for a service that identifies of any potential infringement on our domain names. The information contained on our website does not form part of this report.
 
Government Regulation
 
As a global company we are subject to rules and regulations imposed by a wide range of countries and are diligent in maintaining an awareness of those rules. The common stock of Fushi Copperweld, Inc. is registered with the U.S. Securities and Exchange Commission (“SEC”) and, therefore, we are subject to U.S. rules and regulations regarding our securities and disclosure requirements. Our headquarters and a major manufacturing facility are located in the PRC and as such, we are subject to various tax and business governance rules and regulations imposed by the PRC and it political subdivisions. We also have a major operation in Fayetteville TN and are subject to various commercial and taxing regulations imposed by the US and Tennessee as well as local governments. Our UK operation is subject to rules and regulations applicable to businesses operating in Great Britain. Failure to comply with the various government regulations can have a negative impact on our company; therefore we are diligent in our compliance with these rules and regulations.

In addition, our common stock is traded on the NASDAQ stock exchange. NASDAQ, while not having the force of governmental regulations, imposes significant corporate governance and reporting rules where failure to follow its rules can have an adverse impact on the public’s perception of investing in our stock. If we fail to comply with NASDAQ corporate governance and listing requirements, we could be subject to delisting from the NASDAQ Global Market.
 
Backlog of Orders

Our business is characterized generally by short-term order and shipment schedules. Accordingly, we do not consider backlog at any given date to be indicative of future sales. Our backlog consists of product orders for which we have received a customer purchase order or purchase commitment and which have not yet been shipped. At March 13, 2009, our backlog of orders believed to be firm was $3.4 million compared with $17.3 million at March 14, 2008.  

Environmental Compliance
 
We are subject to environmental regulations that are generally applicable to manufacturing companies in the PRC, UK and in the US and we are subject to periodic inspection by environment regulators and must follow specific procedures in some of our processes. We do not have a record of violating environmental regulations or approved practices either in the PRC, UK or in the US.

12

 
Employees
 
As of December 31, 2008, we had approximately 584 employees worldwide. A majority of our employees are located outside of the United States in the People’s Republic of China and the United Kingdom. Of our employees, approximately 73% work in manufacturing.  The remainder of employees includes engineers, sales and administrative personnel.

As a matter of Company policy, we seek to maintain good relations with our employees at all locations. We believe our relationship with our employees is good.

Available Information

Our website (www.fushicopperweld.com) contains frequent updated information about us and our operations. Our filings with the Securities and Exchange Commission (SEC) on Form 10-K, Form 10-Q, Form 8-K and Proxy Statements and all amendments to those reports can be viewed free of charge as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC by accessing www.fushicopperweld.com and clicking on Investor Relations and then clicking on SEC Filings.

Executive Officers of the Registrant

The following are our Executive Officers as of December 31, 2008.

Directors and Executive Officers
 
Position/Title
 
Age
Li Fu
 
Chairman of Board and CEO
 
43
Wenbing Christopher Wang
 
President and CFO, Director
 
38
James Allen Todd
 
EVP, Financial Controller
 
65

The following is a description of the business experience for the last five years for each of the above named executive officers of our company:

Mr. Li Fu was appointed our Chairman and CEO on December 13, 2005. Mr. Fu is a founder of Dalian Fushi and has been the Executive Director of Dalian Fushi since he founded the company in 2001. Prior to founding Dalian Fushi and focusing his time on Dalian Fushi's management and operations, Mr. Fu had founded and managed Dalian Fushi Enterprise Group Co., Ltd., a holding company owning various subsidiaries in the hotel, process control instrumentation, international trade, automobile maintenance and education businesses. Mr. Fu graduated from PLA University of Science and Technology with a degree in Engineering.
   
Mr. Wenbing Christopher Wang has served as our Chief Financial Officer since December 13, 2005 and on January 21, 2008 was appointed as our President and Director. Mr. Wang has served as Chief Financial Officer of Dalian Fushi since March 2005. Prior to Fushi, Mr. Wang was an Executive Vice President at Redwood Capital, Inc. from November 2004 to March 2005 and an Assistant VP of Portfolio Management at China Century Investment Corporation from October 2002 to September 2004. Mr. Wang worked for Credit Suisse First Boston (HK) Ltd in 2001. From 1999 to 2000, Mr. Wang worked for VCChina as Management Analyst. Fluent in both English and Chinese, Mr. Wang holds an MBA in Finance and Corporate Accounting from Simon Business School of University of Rochester.  Mr. Wang was named one of the top ten CFO’s of 2007 in China by CFO magazine.

Mr. James Allen Todd served as our Controller from October 29, 2007 to February 11, 2009. Mr. Todd was Chief Financial Officer of Copperweld Bimetallics, LLC and previously, beginning in July 2004 Mr. Todd was a co-principal of James A. Todd Associates providing consulting services relating to corporate management, financial services management and delivery to individuals, small companies and to the financial services industry. Prior to that, he was President, CEO, and Chairman of AF Financial Group, the holding company for AF Bank, AF Insurance Services, Inc. and AF Brokerage, Inc. from February 1994 to July 2004.

Mr. Todd retired from his position as Executive Vice President and Financial Controller effective February 11, 2009 and we named Mr. J. Dwight Berry as our new Chief Operating Officer as of the same date.  For additional information regarding Mr. Todd’s resignation and Mr. Berry’s appointment, please refer to our Current Report on Form 8-K filed February 17, 2009 and incorporated herein by reference.

13


ITEM 1A RISK FACTORS

RISKS RELATED TO OUR BUSINESS

Recently announced tightened controls on the convertibility of RMB into foreign currency have made it more difficult to make payments in U.S. dollars or fund business activities outside China.

Substantially all of the cash on our balance sheet are in RMB.  Recently tightened restrictions on currency exchanges has considerably limited our ability to use our cash in RMB to make payments in U.S. dollars or fund business activities outside China, in particular to support our Fayetteville subsidiary.  As a result, our business operations have been adversely affected.  Although the PRC government introduced regulations in 1996 to allow greater convertibility of RMB for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents. In addition, remittance of foreign currencies abroad and conversion of RMB for capital account items, including direct investment and loans, is subject to the approval of the PRC State Administration for Foreign Exchange, or SAFE, and other relevant authorities, and companies are required to open and maintain separate foreign exchange accounts for capital account items. As an example, the new SAFE restrictions caused a delay in payment of interest on our outstanding Notes and forced us to raise capital from outside sources in order to fund working capital for our Fayetteville, TN operations. We cannot assure you the Chinese regulatory authorities will not impose new or more stringent restrictions on the convertibility of RMB, especially with respect to foreign exchange transactions.  Any adverse actions by SAFE could affect our ability to obtain foreign currency through debt or equity financing, including by means of loans or capital contributions.

Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, access to capital and cost of capital.

The capital and credit markets have been experiencing extreme volatility and disruption in recent months, including, among other things, extreme volatility in securities prices, severely diminished liquidity and credit availability, ratings downgrades of certain investments and declining valuations of others. Governments have taken unprecedented actions intended to address extreme market conditions that have included severely restricted credit and declines in real estate values. In some cases, the markets have exerted downward pressure on availability of liquidity and credit capacity for certain issuers. While currently these conditions have not impaired our ability to utilize our current credit facilities and finance our operations, there can be no assurance that there will not be a further deterioration in financial markets and confidence in major economies such that our ability to access credit markets and finance our operations might be impaired. Adverse market conditions may limit our ability to replace, in a timely manner, maturing liabilities and access the capital necessary to operate and grow our business. As such, we may be forced to delay raising capital or bear an unattractive cost of capital which could decrease our profitability and significantly reduce our financial flexibility. Demand for our products is vulnerable to economic downturns.  Although our total revenues continue to improve in 2008 as a whole, the continued worsening of economic condition could result in a decrease in or cancellation of orders for our products. We are unable to predict the duration and severity of the current disruption in financial markets and the global adverse economic conditions and the effect such events might have on our business. Our results of operations, financial condition, cash flows and capital position could be materially adversely affected by disruptions in the financial markets.  Further, any decreased collectability of accounts receivable or early termination of sales contracts due to the current deterioration in economic conditions could negatively impact our results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

14

 
Our Fayetteville, Tennessee operation is dependent upon a line of credit to fund working capital needs and, if we are unable to renew or replace the line of credit, our Fayetteville results of operations would be adversely affected.

Our Fayetteville facility is dependent upon an asset based line of credit (ABL) to fund its working capital needs. In times of declining sales due to circumstances beyond the control of the Company, such as occurred during the fourth quarter of 2008, the level of accounts receivable can decline.  A significant decline in the availability under the ABL can reduce the ability of the Fayetteville facility to purchase raw materials and fund other operating costs.  Raw materials generally require 30 to 60 days from the time the order is placed until the raw materials are delivered but payment from the raw materials is required no more than 30 days from shipment.  Therefore, a reduction in sales from an economic slowdown or from seasonal reductions in sales can have an adverse impact on the facility’s ability to purchase raw materials for future sales.  In periods of increasing sales, delivery of finished products can be adversely affected by limitations on funding for raw materials under the restriction and limitations of the ABL line

The current limit of $12.8 million will limit the sales growth that can occur at the facility when sales growth returns to expected levels. Any increases in the level of debt, including ABL limits, must be approved by the holders of our Notes.  The holders of our Notes refused to approve increases in our ABL line of credit during the second and third quarters of 2008, which resulted in funding shortages during the fourth quarter.  If our current ABL lender terminates the line of credit or fails to renew the line when it matures in April 2010, a significant funding shortfall would occur in the Fayetteville facility.  We would have to seek additional funding sources to pay off the current ABL balance of $4,712,075 at December 31, 2008 and to provide an equal amount to fund working capital needs.  In the current environment, obtaining another ABL with a different lender would be difficult, and our liquidity and results of operations would be negatively impacted if we were unable to obtain alternative funding sources for Fayetteville working capital.

Our China operation's limited operating history may not serve as an adequate basis to judge our future prospects and results of operations.

Our China operation began the sale of copper-clad aluminum wire in 2002. Our limited operating history may not provide a meaningful basis on which to evaluate our business. Although our revenues have grown rapidly since inception, we cannot assure you that we will maintain our rate of growth, our profitability or that we will not incur net losses in the future. We expect that our operating expenses will increase as we expand. Any significant failure to realize anticipated revenue growth could result in significant operating losses. We will continue to encounter risks and difficulties frequently experienced by companies at a similar stage of development, including our potential failure to:
 
-  
expand our product offerings and maintain the high quality of our products;
-  
maintain our proprietary copper-cladding technology for the manufacturing of bimetallic wires;
-  
manage our expanding operations, including the integration of Copperweld Bimetallics and any future acquisitions;
-  
maintain adequate control of our expenses;
-  
implement our product development, marketing, sales, and acquisition strategies and adapt and modify them as needed;
-  
anticipate and adapt to changing conditions in the bimetallic products markets in which we operate as well as the impact of any changes in government regulation, mergers and acquisitions involving our competitors, technological developments and other significant competitive and market dynamics.
 
If we are not successful in addressing any or all of these risks, our business may be materially and adversely affected.

A judgment has been entered against us as a result of recent litigation and, if we are unable to stay enforcement pending our appeal, we will be forced to pay the judgment.

On November 27, 2006, an action was filed against the Company in the United States District Court for the District of Connecticut by Kuhn Brothers, Inc., Kuhn Brothers Securities Corp. and Kuhn Brothers & Co. On August 5, 2008, a judgment was entered against the Company in the amount of $7,197,794, plus interest and attorneys fees. The Company has filed an appeal and is currently seeking to stay enforcement of the judgment pending appeal.  If the Court refused to grant a stay of enforcement, the Company would be forced to pay the entire judgment, which payment could negatively impact the Company’s liquidity and results of operations. See “Item 3 – Legal Proceedings” for a more detailed discussion of the litigation.

15

 
Quarterly operating results may fluctuate due to factors including customer demand and raw materials pricing.

Our quarterly results of operations may fluctuate as a result of a number of factors, including fluctuation in the demand for and shipments of our products and changes in the prices of copper which directly affect the prices of our products and may influence the demand for our products. Therefore, quarter-to-quarter comparisons of results of operations have been and will be impacted by the volume of such orders and shipments. In addition, our operating results could be adversely affected by the following factors, among others, such as variations in the mix of product sales, price changes in response to competitive factors, increases in raw material costs and other significant costs, increases in utility costs (particularly electricity) and various types of insurance coverage and interruptions in plant operations resulting from the interruption of raw material supplies and other factors. Some uses of our products are subject to seasonality factors which can affect our quarter to quarter results as well.

Fluctuating copper prices impact our business and operating results.

Copper prices, which have increased over the past several years followed by more recent sharp declines, have varied significantly and may vary significantly in the future because the copper industry is highly volatile and cyclical in nature. This affects our business both positively and negatively - as our products are a substitute for pure copper wire, higher prices increase demand, while lower copper prices can decrease demand. Numerous factors, most of which are beyond our control, influence copper price. These factors include general economic conditions, industry capacity utilization, import duties and other trade restrictions. We cannot predict copper prices in the future or the effect of fluctuations in the costs of copper on our future operating results. We mitigate the impact of changing raw material prices by attempting to pass changes in prices to our customers by adjusting prices at least monthly to reflect changes in raw material prices, as is customary in the industry. We may not be able to adjust our product prices rapidly enough in the short-term to recover the costs of increases in raw materials. Our future profitability may be adversely affected to the extent we are unable to pass on higher raw material costs to our customers.
 
We may encounter substantial competition in our business and our failure to compete effectively may adversely affect our ability to generate revenue.

The bimetallic industry is becoming increasingly competitive. The principal elements of competition in the bimetallic industry are, in our opinion, pricing, payment terms, product availability and quality. While we believe that we have attained a leadership position with respect to all of these factors, our major competitors with substantially greater resources than us may be better able to successfully endure downturns in our industrial sector. In periods of reduced demand for our products, we can either choose to maintain market share by reducing our selling prices to meet competition or maintain selling prices, which may sacrifice market share. Sales and overall profitability would be reduced under either scenario. In addition, we cannot assure you that additional competitors will not enter our existing markets, or that we will be able to compete successfully against existing or new competition.

We may not be able to effectively control and manage our growth.

If our business and markets grow and develop as we expect, it will be necessary for us to finance and manage expansion in an orderly fashion. In addition, we may face challenges in managing expanding product offerings and in integrating acquired businesses with our own. Such eventualities will increase demands on our existing management and facilities. Failure to manage these growth and expansion could interrupt or adversely affect our operations and cause production backlogs, longer product development time frames and administrative inefficiencies.

A significant portion of our sales are derived from a limited number of customers, and results from operations could be adversely affected and stockholder value harmed if we lose these customers.

Our revenue is dependent, in large part, on significant orders from a limited number of customers. Sales to our five largest customers accounted for approximately 18.2%, 24.6% and 28.9% of our net sales during the years ended December 31, 2008, 2007, and 2006 respectively. We believe that revenue derived from current and future large customers will continue to decline but will continue to represent a significant portion of our total revenue. Our inability to continue to secure and maintain a sufficient number of large customers would have a material adverse effect on our business, operating results and financial condition. Moreover, our success will depend in part upon our ability to obtain orders from new customers, as well as the financial condition and success of our customers and general economic conditions.
 
16

 
Shortages or disruptions in the availability of raw materials could have a material adverse effect on our business.

Aluminum and steel rods and copper strips, our principal raw materials, collectively accounted for approximately 84.8% of our costs of goods sold during the fiscal year ended December 31, 2008. We expect that raw materials will continue to account for a significant portion of our cost of goods sold in the future. The prices of raw materials fluctuate because of general economic conditions, global supply and demand and other factors causing monthly variations in the costs of our raw materials purchases. The macro-economic factors, together with labor and other business interruptions experienced by certain suppliers, have contributed to periodic shortages in the supply of raw materials, and such shortages may increase in the future. If we are unable to procure adequate supplies of raw material to meet our future production needs and customer demand, shortages could result in a material loss of customers and revenues and adversely impact our results of operations. In addition, supply shortages or disruptions or the loss of suppliers may cause us to procure our raw materials from less cost effective sources and may have a material adverse affect on our business, revenues and results of operations.

We depend on a few suppliers for a significant portion of our principal raw materials and we do not have any long-term supply contracts with our raw materials suppliers. Interruptions of production at our key suppliers may affect our results of operations and financial performance.

We rely on a limited number of suppliers for most of the raw materials we use. During the fiscal year ended December 31, 2008, purchase from our five largest suppliers of metal raw materials represented approximately 65% of our total raw material purchases. Purchases from our five largest suppliers of raw materials represented 38.6% and 93.4% in 2007 and 2006, respectively. Interruptions or shortages of supplies from our key suppliers of raw materials could disrupt production or impact our ability to increase production and sales. We do not have long-term or volume purchase agreements with most of our suppliers and we may have limited options in the short-term for alternative supply if these suppliers fail for any reason, including their business failure or financial difficulties, to continue the supply of materials or components. Moreover, identifying and accessing alternative sources may increase our costs. Interruptions at our key suppliers could negatively impact our results of operations, financial performance and the price of our common stock.

Due to increased volatility of raw material prices, the timing lag between the raw material purchase and product pricing can negatively impact our profitability.

Volatility in the prices of raw materials, among other factors, may adversely impact our ability to accurately forecast demand and may have a material adverse impact on our results of operations. For example, our manufacturing activities are determined, and raw materials purchase scheduled, upon forecasted demand while sales prices are determined at the time of order placement, subject to adjustment at fulfillment. The lag between the point when raw materials are acquired in advance and the point when products are actually priced may impact us both positively and negatively, resulting in increased or reduced profitability. In addition, we routinely maintain a certain level of finished goods inventories to meet near term expected demand. Pricing for the sale of these inventories is generally based on current raw material prices. Rapid declines in the price of raw materials may result in our inventories being carried at costs in excess of net realizable value and may have an adverse effect on our results of operations and the price of our common stock.
 
We rely on short-term financing from banks for our daily operation.

We rely on short-term borrowings to fund our financing needs. If we fail to achieve timely rollover, extension or refinancing of our short-term debt, or sufficient availability of financing in the case of our Fayetteville facility, we may be unable to meet our obligations in connection with debt service, accounts payable and/or other liabilities when they become due and payable. In China, short-term bank loans generally mature in one year or less and contain no specific renewal terms.  However, it is customary practice for banks and borrowers to negotiate roll-overs or renewals of short-term borrowings on an on-going basis shortly before they mature.  Although we have renewed our short-term borrowings in the past, we cannot assure you that we will be able to renew these loans in the future as they mature. If we are unable to obtain renewals of these loans or sufficient alternative funding on reasonable terms from banks or other parties, we will have to repay these borrowings with the cash on our balance sheet or cash generated by our future operations, if any.  We cannot assure you that our business will generate sufficient cash flow from operations to repay these borrowings.  In addition, we may be exposed to changes in interest rates. If interest rates increase substantially, our results of operations could be adversely affected.

17

 
Substantial defaults by our customers on accounts receivable could have a material adverse affect on our liquidity and results of operations.
 
A substantial portion of our working capital consists of accounts receivable from customers. If customers responsible for a significant amount of accounts receivable were to become insolvent or otherwise unable to pay for our products, or unable to make payments in a timely manner, our liquidity and results of operations could be materially adversely affected. An economic or industry downturn could materially adversely affect the servicing of these accounts receivable, which could result in longer payment cycles, increased collections costs and defaults in excess of management’s expectations.  A significant deterioration in our ability to collect on accounts receivable could affect our cash flow and working capital position and could also impact the cost or availability of financing available to us.

We face manufacturing challenges due to difficulties in forecasting customer demand.

The volume and timing of sales to our customers may vary due to: variation in demand for our customers’ products; our customers’ attempts to manage their inventory; design changes; changes in our customers’ manufacturing strategy; and acquisitions of or consolidations among customers. Due in part to these factors, many of our customers do not commit to long-term production schedules. Our inability to forecast the level of customer orders with certainty makes it difficult to schedule production and maximize utilization of manufacturing capacity. Customers may cancel their orders, change production quantities or delay production for a number of reasons and such actions could negatively impact our operating results. In addition, we make significant operating decisions based on our estimate of customer requirements. The short-term nature of our customers’ commitments and the possibility of rapid changes in demand for their products reduce our ability to accurately estimate the future requirements of those customers.
 
If we fail to accurately project market demand for our products, our business expansion plan could be jeopardized and our financial condition and results of operations will suffer.

We plan to increase our annual manufacturing capacity and relocate unused capacity from Fayetteville, Tennessee to Dalian, China, to meet an expected increase in demand for our products in the Asia Pacific region. Our decision to increase our manufacturing capacity was based primarily on our projected increases in our sales volume and growth in the size of the bimetallic market in China. If actual customer orders are less than our projected market demand, we may suffer overcapacity problems and may have to leave capacity idle, which can reduce our overall profitability and hurt our financial condition and results of operations.

We may encounter problems associated with our global operations.

As a result of the Copperweld acquisition, a significant portion of our operations consists of manufacturing and sales activities outside of PRC, primarily in the US. Our ability to sell our products and conduct our operations globally is subject to a number of risks. Local economic, political and labor conditions in each country could adversely affect demand for our products and services or disrupt our operations in these markets. We may also experience reduced intellectual property protection or longer and more challenging collection cycles as a result of different customary business practices in certain countries where we do business. Additionally, we face the following risks:
 
-  
International business conditions including the relationships between the U.S., Chinese and other governments;
-  
Unexpected changes in laws, regulations, trade, monetary or fiscal policy, including interest rates, foreign currency exchange rates and changes in the rate of inflation in the U.S., China or other foreign countries;
-  
Tariffs, quotas and other import or export restrictions and other trade barriers;
-  
Difficulties in staffing and management;
 
18

 
-  
Language and cultural barriers; and
-  
Potentially adverse tax consequences.

The anticipated benefits of the Copperweld transaction may not be realized.

We entered the Copperweld acquisition agreement with the expectation that the acquisition will result in a number of benefits to us including, among other things:
 
-  
enhanced revenues;
-  
broader product offering;
-  
significant savings on capital expenditures;
-  
expansion of our global distribution and manufacturing capabilities;
-  
operational improvements;
-  
more effective use of our production capacity; and
-  
diversification of our customer base.
 
Achieving the anticipated benefits of the Copperweld acquisition depends on the successful integration of Fushi’s and Copperweld's products, services, operations, personnel, technology and facilities in a timely and efficient manner. Although we have generally be successful in such integration, difficulties have been experienced, especially given the cultural difference, time zone difference, and language differences. For example, we have encounter delay associated with converting the businesses of Fushi and Copperweld to a common platform. Similarly, the process of reallocating machinery and capacity, combining sales, marketing and manufacturing forces, consolidating administrative functions, and coordinating product and service offerings could take longer, cost more, and provide fewer benefits than initially projected. To the extent any of these events occur, the benefits of the transaction may be reduced.
 
Integrating our business with that of Copperweld is a complex and time-consuming process. Before the acquisition, Fushi and Copperweld operated independently, each with its own business, products, customers, employees, culture and systems. Fushi may continue to face substantial difficulties, costs and delays in integrating the two businesses. These difficulties, costs and delays may include:
 
-  
Costs and delays in moving additional capacity from Fayetteville, TN to Dalian, China;
-  
Costs and delays in implementing common systems and procedures;
-  
Difficulties in combining research and development teams and processes;
-  
Difficulty comparing financial reports due to differing financial and/or internal reporting systems and practices;
-  
Diversion of management resources from the business;
-  
The inability to retain existing customers of each company;
 
19

 
-  
Challenges in retaining and integrating management and other key employees of Fushi and Copperweld;
-  
Difficulty in coordinating operations in an effective and efficient manner; and
-  
The inability to achieve the synergies anticipated to be realized from the acquisition on the timeline presently anticipated, or at all.
 
After the acquisition, communication between the Dalian, Fayetteville and Telford subsidiaries has been challenging as most of our middle and top management staff in Dalian are not educated and trained in the Western system, and we have experienced difficulty hiring new employees in the PRC with such training.  As a result, we experienced integration difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices.

Any one or all of these factors may cause increased operating costs, worse than anticipated financial performance or the loss of customers and employees. Many of these factors are also outside of our control.

The integration process may result in a loss of key personnel of Fushi and/or Copperweld.

Fushi and Copperweld both depend on the services of their key personnel. Current and prospective employees of Fushi and Copperweld may become uncertain or dissatisfied about their changing or future roles with Fushi as the integration evolves. Uncertainty or dissatisfaction may affect the performance of such personnel adversely and the ability of each company to retain and attract key personnel. The loss of the services of one or more of these key employees or the inability of Fushi or Copperweld to attract, train, and retain qualified employees could result in the loss of customers or otherwise inhibit the ability of Fushi to integrate and grow the combined businesses effectively.
 
The combination of Copperweld and Fushi may result in a loss of customers of Copperweld and/or Fushi.

Some customers may seek alternative sources of product and/or services due to, among other reasons, a lack of desire to do business with our combined company or perceptions that we may not continue to support and develop certain products. Difficulties in combining operations could also result in the loss of, potential disputes or litigation with, customers. Any steps by management to counter such potential increased customer attrition may not be effective. Failure by management to retain customers could result in worse than anticipated financial performance.
 
Copperweld’s ability to sustain profitability is uncertain.

Prior to its acquisition by us, Copperweld incurred losses for the entire time it operated as a stand-alone business. The combined company’s ability for the Fayetteville, TN location to generate sufficient revenues and make profits is dependent in large part on its ability to move more value-added production in house, control manufacturing related costs, manage its growth related expenses, make additional capital expenditures, expand its customer base, increase sales of its current products to existing customers, enter into additional supply arrangements and manage its working capital and other financial resources. We cannot provide any assurance that improved profitability can be achieved at the Fayetteville location in the amounts or during the periods expected.
 
Also, see “Risks Related to Our Business- Our Fayetteville, Tennessee operation is dependent upon a line of credit to fund working capital needs and, if we are unable to renew or replace the line of credit, our Fayetteville results of operations would be adversely affected.”
 
We face risks associated with future investments or acquisitions.

An important element of our growth strategy is to invest in or acquire businesses that will enable us, among other things, to expand our manufacturing capacity and the products we offer. However, we may be unable to identify suitable investment or acquisition candidates or may be unable to make these investments or acquisitions on commercially reasonable terms, if at all.

20

 
If we complete an investment or acquisition, we may not realize the anticipated benefits from the transaction. Integrating an acquired business is distracting and time consuming, as well as a potentially expensive process. The successful integration of any acquired businesses requires us to:  
 
-
integrate and retain key management, sales, research and development, production and other personnel;
 
-
incorporate the acquired products or capabilities into our offerings from an engineering, sales and marketing perspective;
 
-
coordinate research and development efforts;
 
-
integrate and support pre-existing supplier, distribution and customer relationships; and
 
-
consolidate duplicate facilities and functions and combine back office accounting, order processing and support functions

Geographic distance between business operations, the compatibility of the technologies and operations being integrated and the disparate corporate cultures being combined also present significant challenges. Acquired businesses are likely to have different standards, controls, contracts, procedures and policies, making it more difficult to implement and harmonize company-wide financial, accounting, billing, information and other systems. Our focus on integrating operations may also distract attention from our day-to-day business and may disrupt key research and development, marketing or sales efforts. If we cannot overcome these challenges, we may not realize actual benefits from future acquisitions, which will impair our overall business results.

We may not be able to prevent others from unauthorized use of Fushi Copperweld patents, which could harm our business and competitive position.

We believe that other manufacturers in the PRC have been infringing our patents and are using our core technology. Although we have pursued legal remedies available in the PRC to protect our patents, we can provide no assurance that the protection afforded under the laws of the PRC is adequate to maintain our competitive position or that we will be successful in all our efforts. Our patents and patent applications may be challenged, invalidated or circumvented in the future. We cannot assure you that our current or potential competitors do not have, and will not obtain, patents that will prevent, limit or interfere with our ability to make, use or sell our products in either the PRC or other countries.

Enforcement and implementation of PRC intellectual property-related laws has historically been lacking. Accordingly, intellectual property rights and confidentiality protections in the PRC may not be as effective as in the United States or other countries. Policing unauthorized use of proprietary technology is difficult and expensive, and we might need to resort to litigation to enforce or defend patents issued to us or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation may require significant expenditure of cash and management efforts and could harm our business, financial condition and results of operations. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, competitive position, business prospects, reputation and the price of our common stock.
 
We did not have effective internal control over financial reporting as of December 31, 2008 due to a material weakness, which relates primarily to management not adhering to controls as designed and a significant deficiency, which relates to untimely booking of assets.  We can make no assurances that additional material weaknesses or significant deficiencies will not be identified in the future. Our failure to implement and maintain effective internal control over financial reporting could cause investors to lose confidence in our reported financial information and have a negative effect on our stock price.

We are subject to the reporting obligations under the U.S. securities laws. The SEC, under Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring public companies to include a report of management on such companies’ internal control over financial reporting in their annual reports that contain an assessment by management of the effectiveness of their internal control over financial reporting at a reasonable assurance level. In addition, pursuant to Auditing Standard No. 5, which is in effect for the fiscal year ended December 31, 2008, our independent registered public accounting firm must attest to and report on the operating effectiveness of the company’s internal controls.

21

 
We evaluated the effectiveness of our internal control over financial reporting as of December 31, 2008.  This evaluation was performed using the Internal Control Evaluation Framework developed by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).  Based on such evaluation, management concluded that the Company’s internal control over financial reporting was not effective and identified one material weakness and one significant deficiency in the Company’s internal control over financial reporting as stated below.
 
Our material weakness related to:
 
·
the Companys not adhering to controls as designed to ensure the timely and accurate disbursement of cash for the fiscal year ended December 31, 2008. The Company’s control system governing cash disbursement practices was adequately designed, faithfully implemented and properly documented by staff.  However, occurrences were detected that final payments were not made to intended payees due to override by certain members of management.  Although such occurrences did not result in material adjustments to the Company’s consolidated financial statements for the year ended December 31, 2008, there is a reasonable possibility that the control did not operate effectively because only certain key management had the ability to authorize, execute and change the disbursement of cash.

Our deficiency related to:
 
·
Failure to maintain effective controls over the financial closing process to ensure the accurate and timely accounting and disclosure of fixed asset including 1) not timely placing equipments received in construction in progress and 2) not timely transferring completed equipments to fixed assets.   

To address the material weakness and significant deficiency, we have:
 
·
revised the reporting structure and established clear roles, responsibilities, and accountability;
 
·
reorganized the cash disbursement process by including staff from different departments to ensure adequate segregation of duties;
 
·
implemented additional controls to continuously improve our period-end closing procedures by ensuring that account reconciliations and analyses are adequately reviewed for completeness and accuracy to timely identify adjustments, particularly as it relates to fixed assets;   
 
·
evaluated the sufficiency of financial and accounting staff in Dalian, China, Fayetteville, Tennessee, and Telford, England and, based on that evaluation, we hired and continue to hire additional accounting staff;
 
·
implemented a formal training program to train all key employees, especially new hires, on our antifraud programs, corporate governance guidelines, and business ethics; and
 
·
engaged a professional advisory firm on outsourcing part of our internal audit function.
 
We believe that the steps we are taking are necessary for remediation of the material weakness and significant deficiency identified above, and we will continue to monitor the effectiveness of these steps and to make any changes that our management deems appropriate.  However, we can make no assurances that we can fully remediate the material weakness or the significant deficiency or address additional material weaknesses or significant deficiencies that may subsequently arise by the year end of fiscal year 2009, so that our management will be able to conclude that we will have effective internal control over financial reporting as of December 31, 2009.

Further, we can make no assurances that additional material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional significant deficiencies or material weaknesses, causing us to fail to meet our periodic reporting obligations or result in the loss of investor confidence in the reliability of our financial reporting processes.  Any such failure could adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting that are required under Section 404 of the Sarbanes-Oxley Act of 2002. The existence of a material weakness could result in errors in our financial statements that could result in restatement of financial statements, causing us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.  Furthermore, we anticipate that we will continue to incur considerable costs and use significant management and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act of 2002.  See Item 9A. “Controls and Procedures” for a more detailed discussion

22

 
Potential environmental liability could have a material adverse effect on our operations and financial condition.

As a manufacturer, we are subject to various Chinese environmental laws and regulations on air emission, waste water discharge, solid wastes and noise. Although we believe that our operations are in substantial compliance with current environmental laws and regulations, we may not be able to comply with these regulations at all times as the Chinese environmental legal regime is evolving and becoming more stringent. Therefore, if the Chinese government imposes more stringent regulations in the future, we will have to incur additional and potentially substantial costs and expenses in order to comply with new regulations, which may negatively affect our results of operations. If we fail to comply with any of the present or future environmental regulations in any material aspects, we may suffer from negative publicity and may be required to pay substantial fines, suspend or even cease operations.
 
Regulations promulgated by the US government, the State of Tennessee and local authorities impose environmental rules and regulations on our Fayetteville operation. Our Fayetteville plant is subject to regular reporting to and inspections by local, state and federal authorities. To date, inspections have not found our Fayetteville plant in violation of any rules or regulations. We believe that we comply in all material respects with the environmental rules imposed on our Fayetteville plant. Our internal procedures require regular monitoring of our processes to assure that we do not violate environmental standards. Failure to comply with Chinese or US environmental laws and regulations may materially and adversely affect our business, financial condition and results of operations.

We do not presently maintain product liability insurance in the PRC, and our property and equipment insurance does not cover the full value of our property and equipment, which leaves us with exposure in the event of loss or damage to our properties or claims filed against us.

We currently do not carry any product liability or other similar insurance in China. We cannot assure you that we would not face liability in the event of the failure of any of our products. This is particularly true given our plan to significantly expand our sales into international markets, like the United States, where product liability claims are more prevalent. We carry product liability insurance for our Fayetteville operations but we have no assurance that the coverage would be sufficient in the event of a claim.

We have purchased automobile insurance with third party liability coverage for our vehicles. In addition, we have purchased property insurance from China United Property Insurance Company to cover real property and plant. Except for property and automobile insurance, we do not have other insurance such as business liability or disruption insurance coverage for our operations in the PRC. In the event of a significant product liability claim or other uninsured event, our financial results and the price of our common stock may be adversely affected. Likewise, we maintain casualty insurance for our plant and equipment in Fayetteville and Telford; however, we cannot assure you that the coverage would be sufficient to replace our equipment in the event of a catastrophe.

We do not maintain a reserve fund for warranty or defective products claims. Our costs could substantially increase if we experience a significant number of warranty claims.

Our product warranties against technical defects of our copper-clad products wires vary, depending on our purchase orders with customers. The warranties require us to replace defective components and pay for the losses customers incur from defective products or a certain percentage of the purchase price as liquidated damages for our failure to meet the specified product specifications and packaging requirements in the purchase orders. We have not established any reserve funds for potential warranty claims since historically we have experienced few warranty claims for our products so that the costs associated with our warranty claims have been low. If we experience an increase in warranty claims or if our repair and replacement costs associated with warranty claims increase significantly, it would have a material adverse effect on our financial condition and results of operations.

We could suffer significant business interruptions.

Our operations and those of our suppliers may be vulnerable to interruption by natural disasters such as the earthquake experienced in Sichuan province of China in May 2008, or other disasters such as fires, explosions, acts of terrorism or war, or government imposed restriction or reduction on industrial manufacturing activities such as the one during the Olympics from August to September 2008. If a business interruption occurs, our business could be materially and adversely affected.

23

 
RISKS RELATED TO DOING BUSINESS IN THE PRC

Changes in the policies of the PRC government could have a significant impact upon the business we may be able to conduct in the PRC and the profitability of that business.

The PRC's economy is in a transition from a planned economy to a market oriented economy subject to five-year and annual plans adopted by the government that set national economic development goals. Policies of the PRC government can have significant effects on the economic conditions of the PRC. The PRC government has confirmed that economic development will follow the model of a market economy, such as the United States. Under this direction, we believe that the PRC will continue to strengthen its economic and trading relationships with foreign countries and business development in the PRC will follow market forces. While we believe that this trend will continue, we cannot assure you that this will be the case. Our interests may be adversely affected by changes in policies by the PRC government, including:
 
-  
changes in laws, regulations or their interpretation
-  
confiscatory taxation
-  
restrictions on currency conversion, imports or sources of supplies
-  
expropriation or nationalization of private enterprises.
 
Although the PRC government has been pursuing economic reform policies for more than two decades, we cannot assure you that the government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting the PRC's political, economic and social life.
 
The PRC laws and regulations governing our current business operations are sometimes vague and uncertain. Any changes in such PRC laws and regulations may have a material and adverse effect on our business.

There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including but not limited to the laws and regulations governing our business, or the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. We and any future subsidiaries are considered foreign persons or foreign funded enterprises under PRC laws, and as a result, we are required to comply with PRC laws and regulations. These laws and regulations are sometimes vague and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses.

Restrictions on the convertibility of RMB into foreign currency may limit our ability to make payments in U.S. dollars or fund business activities outside China.
 
Substantially all of the cash on our balance sheet are in RMB.  Recently tightened restriction on currency exchanges has considerably limited our ability to use our cash in RMB to make payments in U.S. dollars or fund business activities outside China, in particular to support our Fayetteville subsidiary.  As a result, our business operations have been adversely affected.  Although the PRC government introduced regulations in 1996 to allow greater convertibility of RMB for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents. In addition, remittance of foreign currencies abroad and conversion of RMB for capital account items, including direct investment and loans, is subject to the approval of the PRC State Administration for Foreign Exchange, or SAFE, and other relevant authorities, and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot assure you the Chinese regulatory authorities will not impose new or more stringent restrictions on the convertibility of RMB, especially with respect to foreign exchange transactions.  Any adverse actions by SAFE could affect our ability to obtain foreign currency through debt or equity financing, including by means of loans or capital contributions.

24

 
A slowdown or other adverse developments in the PRC economy may materially and adversely affect our customers, demand for our products and our business.

A majority of our operations are conducted in the PRC and more than 72.4% of our net sales for 2008 were generated from sales in the PRC. Although the PRC economy has grown significantly in recent years, we cannot assure you that such growth will continue. The bimetallic wire industry in the PRC is growing, but we do not know how sensitive we are to a slowdown in economic growth or other adverse changes in the PRC economy which may affect demand for our products. With the addition of Copperweld we are now exposed to global economic conditions. In the future, a slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments globally or in a large segment of the world could have adverse economic developments and may materially and adversely affect our business.

Fushi International (Dalian) and Dalian Fushi are subject to restrictions on paying dividends and making other payments to us.

We are a holding company incorporated in the State of Nevada and do not have any assets or conduct any business operations other than investments in our subsidiaries and affiliates, Copperweld Bimetallics, LLC, Fushi International (Dalian) and Dalian Fushi. As a result of this holding company structure, we rely on dividends payments from our subsidiaries for funds. PRC regulations, which apply to Fushi International (Dalian) and Dalian Fushi, currently permit payment of dividends only out of accumulated profits, as determined in accordance with PRC accounting standards and regulations. Fushi International (Dalian) and Dalian Fushi also are required to set aside a portion of their after-tax profits according to PRC accounting standards and regulations to fund certain reserve funds. The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. We may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency. Furthermore, if Fushi International (Dalian) or Dalian Fushi incurs debt on its own in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments. If we or Fushi International (Dalian) are unable to receive all of the revenues from operations or if Copperweld is unable to pay dividends to the parent, we may be unable to pay dividends on our common stock. See also "Risk Factors—Risks Related to an Investment in Our Common Stock — We are unlikely to pay cash dividends in the foreseeable future."
 
The fluctuation of the Renminbi may materially and adversely affect your investment.

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC's political and economic conditions. Since a significant portion of our revenues are earned in the PRC, any significant revaluation of the Renminbi may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar could have a material adverse effect on our business, financial condition and results of operations. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our common stock or for other business purposes and the U.S. dollar appreciates against the Renminbi the U.S. dollar equivalent of the we convert would be reduced. In addition, the depreciation of significant U.S. dollar denominated assets could result in a charge to our income statement and a reduction in the value of these assets.

On July 21, 2005, the PRC government changed its policy of tying the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in a continuous appreciation of the Renminbi against the U.S. dollar. While the international reaction to the Renminbi revaluation generally has been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against the U.S. dollar.
 
The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this presentation or will use in the preparation of our periodic reports or any other information to be provided to you. The source of these rates is the Federal Reserve Bank of New York.
 
25

 
   
Noon Buying Rate
 
Period
 
Period End
   
Average(1)
   
Low
   
High
 
(RMB per US$1.00)
                       
                         
2002
    8.2800       8.2772       8.2800       8.2700  
2003
    8.2767       8.2771       8.2800       8.2765  
2004
    8.2765       8.2768       8.2774       8.2764  
2005
    8.0702       8.1826       8.2765       8.0702  
2006
    7.8041       7.9636       8.0702       7.8041  
2007
    7.2946       7.6058       7.8127       7.2946  
2008
    6.8225       6.9477       7.2946       6.7800  

(1) 
Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period.
 
(2) 
Unless otherwise noted, all translations from RMB to U.S. dollars and from U.S. dollars to RMB in this report were made in the statement of operations at 6.948 to $1, balance sheet at 6.823 to $1 and equity section at historical rates.
 
If preferential tax concessions granted by the PRC government are changed or expire, our financial results and results of operations would be materially and adversely affected.

Our results of operation may be adversely affected by changes to, or expiration of, preferential tax concessions that our subsidiaries in the PRC currently enjoy. The statutory tax rate generally applicable to domestic PRC companies is 33%, including 30% state income tax and 3% local income tax. Our subsidiaries, Fushi International (Dalian) as a Wholly Foreign Owned Enterprise, or WFOE, and Dalian Fushi as a “new or high-technology enterprise” located in Economic Development Zone of the Dalian City, have been subject to tax exemptions or relatively low tax rates. The estimated tax savings for the year ended December 31, 2008 without preferential tax treatment amounted to approximately $5.9 million.

As the newly adopted PRC corporate income tax law comes into effect, preferential tax benefits currently granted to WFOE’s are to be phased out and we would be subject to the same tax treatment as a domestic Chinese company, applying a uniform 25% tax rate to company profits. The loss of these preferential tax treatments that are currently available to us will have a material and adverse effect on our financial condition and results of operations and could adversely impact the price of our common stock.
 
In addition, tax laws in China are subject to interpretation by local tax authorities. Our preferential tax treatment may not remain in effect, or may change, in which case we may be required to pay the higher income tax rate generally applicable to Chinese companies, or such other rate as is required by the laws of China.

The PRC State Administration of Foreign Exchange, or SAFE, requires PRC residents to register with, or obtain approval from, SAFE regarding their direct or indirect offshore investment activities.

PRC State Administration of Foreign Exchange Regulations regarding offshore financing activities by PRC residents have undertaken continuous changes which may increase the administrative burden we face and create regulatory uncertainties that could adversely affect the implementation of our acquisition strategy, and a failure by our shareholders who are PRC residents to make any required applications and filings pursuant to such regulations may prevent us from being able to distribute profits and could expose us and our PRC resident shareholders to liability under PRC law.
 
26

 
We will not be able to complete an acquisition of prospective acquisition targets in the PRC unless their financial statements are able to be reconciled to U.S. generally accepted accounting principles in a timely manner.
 
Companies based in the PRC may not have properly kept financial books and records that may be reconciled with U.S. generally accepted accounting principles. If we attempt to acquire a significant PRC target company and/or its assets, we would be required to obtain or prepare financial statements of the target that are prepared in accordance with and reconciled to U.S. generally accepted accounting principles. Federal securities laws require that a business combination meeting certain financial significance tests require the public acquirer to prepare and file historical and/or pro forma financial statement disclosure with the SEC. These financial statements must be prepared in accordance with, or be reconciled to U.S. generally accepted accounting principles and the historical financial statements must be audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), or PCAOB. If a proposed acquisition target does not have financial statements that have been prepared in accordance with, or that can be reconciled to, U.S. generally accepted accounting principles and audited in accordance with the standards of the PCAOB, we will not be able to acquire that proposed acquisition target. These financial statement requirements may limit the pool of potential acquisition targets with which we may acquire and hinder our ability to expand our operations. Furthermore, if we consummate an acquisition and are unable to timely file audited financial statements and/or pro forma financial information required by the Exchange Act, such as Item 9.01 of Form 8-K, we will be ineligible to use the SEC’s short-form registration statement on Form S-3 to raise capital, if we are otherwise eligible to use a Form S-3. If we are ineligible to use a Form S-3, the process of raising capital may be more expensive and time consuming and the terms of any offering transaction may not be as favorable as they would have been if we were eligible to use Form S-3.

Any recurrence of severe acute respiratory syndrome, or SARS, or another widespread public health problem, could adversely affect our operations.

A renewed outbreak of SARS or another widespread public health problem in the PRC, where a substantial portion of our revenue is derived, could have an adverse effect on our operations. Our operations may be impacted by a number of health-related factors, including quarantines or closures of some of our offices that could leave us without many employees to conduct our business which would materially and adversely affect our operations and financial condition.

We may have difficulty establishing adequate management, legal and financial controls in the PRC.

PRC companies have historically not adopted a Western style of management and financial reporting concepts and practices, which includes strong corporate governance, internal controls and, computer, financial and other control systems. In addition, we may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards. Therefore, we may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or material weaknesses in our internal controls which could impact the reliability of our financial statements and prevent us from complying with SEC rules and regulations and the requirements of the Sarbanes-Oxley Act of 2002. Any such deficiencies, weaknesses or lack of compliance could have a materially adverse effect on our business.

RISKS RELATED TO AN INVESTMENT IN OUR COMMON STOCK.

Our existing shareholders have substantial influence over our company and their interests may not be aligned with the interests of our other shareholders. 

Mr. Li Fu, our founder, chief executive officer and chairman of our board of directors, beneficially owns approximately 40.0% of our outstanding share capital as of March 16, 2009. As such, Mr. Fu has substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our stock. These actions may be taken even if they are opposed by our other shareholders. In addition, pursuant to the Indentures governing the Notes, if Mr. Li Fu ceases to be the beneficial owners, directly or indirectly, of at least 35% of the total voting power of the voting stocks of the Company, a “Change of Control” occurs. Upon the occurrence of a Change of Control, the Company shall be required to make a “Change of Control” offer, which could have a material adverse effect on the Company’s liquidity.
 
27

 
We are unlikely to pay cash dividends in the foreseeable future.

We currently intend to retain any future earnings for use in the operation and expansion of our business. We do not expect to pay cash dividends in the foreseeable future but will review this policy as circumstances dictate. Should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries. In addition, our operating subsidiaries, particularly those in the PRC, from time to time, may be subject to restrictions on its ability to make distributions to us, including as a result of restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions. See, "Risk Factors-Risks Related to Doing Business in the PRC— Fushi International (Dalian) and Dalian Fushi are subject to restrictions on paying dividends and making other payments to us", Risk Factors-Risks Related to Doing Business in the PRC— Governmental control of currency conversion may affect the value of your investment" and "Market for Our Common Stock— Dividends."

Due to limited liquidity, our stock is subject to price volatility unrelated to our operations.

The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other companies in the same industry, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market may be subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.


RISKS RELATED TO OUR HIGH YIELD AND CONVERTIBLE NOTES

Covenants in our debt instruments restrict or prohibit our ability to engage in or enter into a variety of transactions.

On January 25, 2007, we entered a Notes Purchase Agreement with Citadel Equity Fund, LLC, as well as Indentures, a Share Pledge Agreement and an Investor Rights Agreement. The Notes Purchase Agreement relates to the purchase and sale of $40 million Guaranteed Senior Secured Floating Rate Notes Due 2012 and $20 million of 3% Guaranteed Senior Secured Convertible Notes Due 2012 (collectively “Notes”).

The indentures governing our Notes contain various covenants that may limit our discretion in operating our business. In particular, we are limited in our ability to merge, consolidate or transfer substantially all of our assets, issue stock of subsidiaries, incur additional debts and create liens on our assets to secure debt. These covenants and ratios could also have an adverse effect on our business by limiting our ability to take advantage of financing, merger and acquisition or other corporate opportunities and to fund our operations.

The Notes and their corresponding debt could have significant consequences to investors. For example, they could: 
 
·
reduce the availability of our cash flow to fund future working capital, capital expenditures, acquisitions and other general corporate purposes;
 
·
limit our ability to obtain additional financing for working capital, capital expenditures, and other general corporate requirements;
 
·
restrict us from making strategic acquisitions or pursuing business opportunities;
 
·
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
 
·
place us at a competitive disadvantage compared to competitors that may have proportionately less debt.
 
We have previously experienced payment delays due to delays in conversion from RMB to USD caused by the tightened controls under SAFE. While the Company is now current in its payment obligations, any delay in paying interest, if extended, raises the possibility of the potential acceleration of the maturity of the Notes. If the Company experiences future payment delays or otherwise violates the terms of the Notes, the holders of the Notes could accelerate the maturity of the Notes and the Company’s liquidity could be materially and adversely affected.

28

 
In addition, our ability to make scheduled payments or refinance our obligations depends on our successful financial and operating performance, cash flows, and capital resources, which in turn depend upon prevailing economic conditions and certain financial, business, and other factors, many of which are beyond our control. If our cash flows and capital resources are insufficient to fund our debt obligations, we may be forced to reduce or deplete our working capital, reduce or delay capital expenditures, sell material assets or operations, obtain additional capital, restructure our debt, or declare bankruptcy. In the event that we are required to dispose of material assets or operations to meet our debt service and other obligations, the value realized on such assets or operations will depend on market conditions and the availability of buyers. Accordingly, we may be forced to sell at an unfavorable price.

We have pledged the shares of our subsidiaries as security for the Notes and, upon a default, we could lose those securities and therefore, our business.

Pursuant to our Share Pledge Agreement, we have pledged the shares of our wholly owned subsidiary, Fushi Holdings, and its shares of Fushi International (Dalian) as security for our obligations under the Notes. In the event of a default, we could lose the shares of our subsidiaries and therefore, a major portion of our business, to the holders of the Notes which would materially and adversely affect the price of our common stock.

The issuance of shares upon conversion of the Convertible Notes after reset of conversion price and occurrence of Financial and Operational Trigger may result in substantial dilution.

The Convertible Notes are convertible at the option of the holder into the Company’s common stock at an initial conversion price of $7 per share (approximating 14,286 shares per $100,000 principal amount of the Convertible Notes).

On January 8, 2008, Citadel Equity Fund Ltd. exercised its rights under the CB indenture and received 2,142,857 shares in exchange for $15.0 million in debt with an exchange factor of $7.00 in debt for each share of stock.  The balance $5 million Convertible Notes are convertible with the conversion price subject to downward adjustment occurring on March 1 and September 1 of each year, beginning with March 1, 2008, to equal the simple arithmetic average of VWAP for the fifteen trading days preceding such March 1 or September1, with a floor of $4.5.

In addition, adjustment of conversion price will be made if and at each time, upon completion of the quarter review (for each Fiscal Quarter ended March 31, June 30 and September 30) or annual audit (for each Fiscal Quarter ended December 31) of the Company’s financial statements an event defined as Financial and Operational Trigger under the CB indenture shall have occurred in the immediately preceding Fiscal Quarter, then within five (5) Business Days following issuance of the review or audit report, as the case may be, for such Fiscal Quarter.  The Financial and Operational Trigger means, for the Company and its Subsidiaries on a consolidated basis, that net income for a Fiscal Quarter shall be less than the US dollar amount indicated in the table below opposite such Fiscal Quarter:

Fiscal Quarter Ending
 
Net Income
 
June 30, 2007
  $ 5.0 million  
September 30, 2007
  $ 5.0 million  
December 31, 2007
  $ 5.0 million  
March 31, 2008
  $ 6.0 million  
June 30, 2008
  $ 6.0 million  
September 30, 2008
  $ 6.0 million  
December 31, 2008
  $ 6.0 million  
March 31, 2009
  $ 7.2 million  
June 30, 2009
  $ 7.2 million  
September 30, 2009
  $ 7.2 million  
December 31, 2009
  $ 7.2 million  

Upon review of our financial statements, we determined that a Financial and Operational Trigger as defined under the CB indenture occurred in the quarter ended December 31, 2008.  To the extent a conversion occurs, the Company shall be required to deliver approximately 140,000 additional shares of the Company’s common stock to the holder of the Convertible Notes by increasing the conversion rate with respect to such notes.  Further, the Company cannot provide assurance that Financial and Operational Trigger may not occur again in future fiscal quarters especially under challenging macro-economic conditions and difficult operating environments like the current one which are circumstances beyond the control of the Company.

29

 
To the extent conversion occurs under the above mentioned circumstances, our ordinary shareholders may experience substantial dilution and the market price of our shares of common stock could decline.  In addition, during the time that the foregoing Convertible Notes are outstanding, they may adversely affect the terms on which we could obtain additional capital.
 
ITEM 1B  
UNRESOLVED STAFF COMMENTS

None.
 
ITEM 2.
PROPERTIES

Under PRC law, all land in the PRC is owned by the government, which grants a "land use right" to an individual or entity after a purchase price for such "land use right" is paid to the government. The "land use right" allows the holder the right to use the land for a specified long-term periods of time and enjoys all the ownership incidents to the land. Dalian Fushi holds land use rights for one piece of land that was used in its business and Fushi International (Dalian)'s business. In addition, we have the right to use another smaller piece of land that is registered under the name of a formerly affiliated company (the “Dongyi Property”). The Company also owns and leases various manufacturing and sales and administrative offices around the world. The Company believes that is properties are generally well maintained and are adequate for the Company’s current level of operations:
 
Registered
Owner of land
use right
 
Location &
Certificate of
Land Use Right
Number
 
Usage
 
Square Meters
 
Construction on
the Land
 
Term of Use Right
                     
Dalian Fushi
 
1 Shuang Qiang
 
Industrial
 
103,605 Sq. M;
 
Dalian Fushi's
 
50 years from
   
Road, Yang Jia
 
Use
     
new facilities
 
July, 2003
   
Village, Jinzhou
               
   
District, Dalian,
               
   
PRC; #0625014
               
                     
Dongyi
 
8 Hai La'er Road,
 
Industrial
 
3,569 Sq. M;
 
Dalian Fushi's
 
40 years from
   
Dalian
 
Use
     
old facilities
 
March 4, 1989
   
Development Zone;
               
   
PRC;
               
   
#0626006
               
Fushi International
(Dalian)
 
 
Wafangdian, Dalian
 
Industrial
 
90,640 Sq. M; 
     
Rights terminate on Oct. 28, 2038.
Copperweld Bimetallics LLC
 
 
254 Cotton Mill Rd., Fayetteville, TN
 
Industrial
 
 52 Ares or
210,437
 
Industrial Building of 285,000 Sq.ft. or 26,477 Sq. M.
 
1975 with Construction in 1975, 1990, 1995, 1998
 
30

 
We acquired the Dongyi Property in connection with the acquisition of Dongyi in 2001. Dongyi was dissolved after the acquisition. Because of the transfer fees that would be incurred as a result of change of registered owner, and because this land is no longer being used in the business, we have not, and we do not intend to change the registered owner of this land. Currently, we lease the facilities located on the Dongyi Property to a third party.
 
The land registered under our name, as well as the buildings and improvements on the land, secures our bank loans from Bank of China and Industrial and Commercial Bank. We acquired rights to the Wafangdian property during the fourth quarter of 2007 in order to have access to electrical power required to operate larger machines. The property is currently used for retail trade but such use will cease if we develop the property. Management has not determined when construction will begin on this property.
 
Copperweld Bimetallics, LLC’s predecessor company acquired the Fayetteville Tennessee property in 1975 though a Payment In Lieu of Taxes (PILOT) program commonly offered in Tennessee by local industrial community development programs established to encourage industry development.  Copperweld owns the property but the Industrial Development Board holds a lease on the property to secure the “In Lieu of Taxes.”  There is no financing lien on the property.  The net effect of the lease is to provide Copperweld with a reduction in local city and county property taxes to a rate of 50% of the normal rate.

For information concerning the costs associated with land use rights, see note 7 to Dalian Fushi's audited financial statements for the year ended December 31, 2008.
 
ITEM 3.
LEGAL PROCEEDINGS

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.  In addition to the litigations described below, we have also commenced a number of legal actions against companies which we believe are infringing on our patents, as described above.

Kuhns Brothers Litigation
 
Kuhns Brothers, Inc., et al. v. Fushi Copperweld, Inc. f/k/a Fushi International, Inc., et al., United States District Court for the District of Connecticut, Civil Action No. 3:06-CV-1917. On November 27, 2006, an action was filed against the Company in the United States District Court for the District of Connecticut by Kuhn Brothers, Inc., Kuhn Brothers Securities Corp. and Kuhn Brothers & Co. On August 5, 2008, a judgment was entered against the Company in the amount of $7,197,794, plus interest and attorneys fees. The Company has appealed the judgment to the United States Court of Appeals for the Second Circuit, Case No. 08-411-CV, and will continue to vigorously defend against these claims which we believe to be without merit. However, we have no assurance that we will prevail in our appeal. The enforcement of the judgment is not stayed pending the appeal, and the Plaintiffs could execute against the Company at any time. We believe that if the Company is required to pay the judgment, it will impact the Company's liquidity and working capital. However, we do not believe that the payment of the judgment, if required, will adversely affect the Company's ability to fund its working capital or capital expenditure needs.  See “Risk Factors – Risks Related to Our Business - A judgment has been entered against us as a result of recent litigation and, if we are unable to stay enforcement pending our appeal, we will be forced to pay the judgment.”
 
31

 
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders in the fourth quarter of 2008
 
PART II

ITEM 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED
 STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

The Company's common stock is currently quoted on the NASDAQ Global Market under the trading symbol "FSIN."
 
On March 13, 2009, the last reported close price of our common stock was $4.54 per share.
 
As of December 31, 2008, there were approximately 549 holders of record of our outstanding shares. 

The high and low prices for each of the fiscal quarters for fiscal years ended on December 31, 2007 and December 31, 2008 are set forth below:

Quarter Ended
 
High
   
Low
   
Closing
Price
 
                   
03/30/2007
  $ 8.80     $ 8.10     $ 8.20  
                         
06/29/2007
  $ 13.15     $ 12.80     $ 13.15  
                         
09/28/2007
  $ 15.10     $ 13.60     $ 13.95  
                         
12/31/2007
  $ 25.70     $ 24.30     $ 25.17  
                         
03/31/2008
  $ 15.29     $ 14.88     $ 15.00  
                         
06/30/2008
  $ 24.2     $ 23.42     $ 23.73  
                         
09/30/2008
  $ 9.78     $ 8.93     $ 9.69  
                         
12/31/2008
  $ 5.89     $ 5.27     $ 5.27  
 
Dividends

Our board of directors has not declared a dividend on our common stock during the last two fiscal years or the subsequent interim period and we do not anticipate the payments of dividends in the near future as we intend to reinvest our profits to grow operations. See "Risk Factors - Risks Related to an Investment in our common stock - We are unlikely to pay cash dividends in the foreseeable future." We rely entirely on dividends from Fushi International (Dalian) for our funds and PRC regulations may limit the amount of funds distributed to us from Fushi International (Dalian), which will affect our ability to declare any dividends. See "Risk Factors - Risks Related to Doing Business in the PRC - Fushi International (Dalian) and Dalian Fushi are subject to restrictions on paying dividends and making other payments to us" and "- Governmental control of currency conversion may affect the value of your investment."
 
32

 
Equity Compensation Plan Information at December 31, 2008

The following tabular disclosure provides information as of December 31, 2008 regarding the Company’s common stock authorized for issuance under equity compensation plans.

Plan Category
 
Number of Securities to be
Issued for Outstanding
Options and Performance
Share Awards
   
Weighted
Average
Exercise Price
 
Number of Securities
Remaining Available for
Future Issuance Under Equity
Compensation Plans
 
Equity compensation plans approved by security holders
    384,000     $ 19.19       416,000  
Equity compensation plans not approved by security holders
    683,333     $ 12.56       -  
Total
    1,067,333     $ 14.94       416,000  

33

 
STOCK PERFORMANCE GRAPH


 
 
1/30/06
      12/06       12/07       12/08  
                                 
Fushi Copperweld Inc.
    100.00       51.00       251.70       52.70  
NASDAQ Composite
    100.00       100.21       125.19       70.09  
NASDAQ Industrial
    100.00       109.13       117.26       63.23  

The annual changes for the three-year period shown in the graph on this page are based on the assumption that $100 had been invested in Fushi common stock, the Nasdaq Composite Index and the Nasdaq Industrial Index on January 30, 2006, the date Fushi common stock began trading publicly, and that all quarterly dividends were reinvested. The total cumulative dollar returns shown on the graph represent the value that such investments would have had on December 31, 2008.

This performance graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC, or subject to Regulation 14A or 14C, other than as provided in Item 201 of Regulation S-K, or subject to the liability of Section 18 of the Exchange Act, nor shall it be deemed incorporated by reference in any of our filings under the Securities Act or Exchange Act, except to the extent that we specifically request incorporation by reference thereof.

Information used on the graphs was obtained from Research Data Group, Inc., a source believed to be reliable, but we are not responsible for any errors or omissions in such information.
 
34

 
Recent Sales of Unregistered Securities.

During the fiscal year ended December 31, 2008, a total of 44,873 warrants were exercised at $3.11 per share. The shares of common stock issued upon exercise were issued in reliance on Section 4(2) under the Securities Act of 1933.

Issuer Purchases of Equity Securities.

None.
 
35

 
ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth our selected consolidated financial data for the years ended December 31, 2008, 2007, 2006, 2005and 2004. You should read the following table in conjunction with the consolidated financial statements and related notes contained elsewhere in the report on Form 10-K. Operating results for any year are not necessarily indicative of results for any future periods.
 
   
Years Ended December 31,
 
   
2008
   
2007
   
2006
   
2005
   
2004
 
   
(in thousands, except per share data)
 
Consolidated Statements of Operations Data
                             
NET REVENUE
  $ 221,435       128,222       67,596       33,709       15,662  
Cost of revenue )
    164,182       85,774       42,782       21,400       8,947  
GROSS PROFIT
    57,253       42,448       24,814       12,309       6,715  
OPERATING EXPENSES:
                                       
Research and development
    403       154       195       65       -  
Sales, general and administrative
    19,760       11,649       4,233       2,282       1,997  
Total operating expenses
    20,163       11,803       4,428       2,347       1,997  
INCOME (LOSS) FROM OPERATIONS
    37,090       30,645       20,386       9,962       4,718  
INTEREST AND OTHER INCOME (EXPENSE):
                                       
Interest and investment income
    826       3,331       74       288       133  
Interest and other expense
    (8,946 )     (7,322 )     (2,252 )     (1,049 )     (379 )
Total interest and other income (expense), net
    (8,120 )     (3,991 )     (2,178 )     (761 )     (246 )
INCOME (LOSS) BEFORE INCOME TAXES
    28,970       26,654       18,208       9,201       4,472  
(BENEFIT) PROVISION FOR INCOME TAXES
    495       (2,852 )     398       1,402       (667 )
NET INCOME (LOSS)
  $ 28,475       29,506       17,810       7,799       3,805  
NET INCOME (LOSS) PER SHARE:
                                       
Basic
  $ 1.04       1.33       0.89       2,015.76       -  
Diluted
  $ 1.00       1.19       0.84       0.5       0.25  
WEIGHTED AVERAGE SHARES USED IN NET INCOME (LOSS) PER SHARE CALCULATION:
                                       
Basic
    27,299       22,179       19,933       3,869       -  
Diluted
    28,272       25,244       21,276       15,689       15,476  
                                         
   
Years Ended December 31,
 
   
2008
   
2007
   
2006
   
2005
   
2004
 
   
(in thousands)
 
Consolidated Balance Sheet Data
                                       
Cash and cash equivalents
  $ 65,612       79,915       20,494       6,164       2,612  
Working capital
    106,443       91,009       18,055       10,077       (2,729 )
Total assets
    294,458       246,469       96,162       71,137       48,834  
Total long term obligations
    44,377       68,515       10,256       9,676       9,676  
Total stockholders’ equity
    202,980       144,288       65,134       44,465       26,292  
 
36

 

(a) In October 2007, the Company completed the acquisition of Copperweld Holdings LLC. The results of operations of the acquired company are included in the consolidated financial statements since that date.
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the notes to those financial statements appearing elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth under “Forward Looking Statements” and “Item 1A. Risk Factors” and elsewhere in this Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview
 
We are the global leader in the development, design, manufacture, marketing and distribution of copper-cladded bimetallic engineered conductor products. Our principal products, copper-clad aluminum (“CCA”) and copper-clad steel (“CCS”) are primarily used as conductor components within wire and cable products in the telecommunication, utility, transportation and industrial industries.

Today, we serve approximately 300 customers in 38 countries from our facilities in Dalian, China, Fayetteville, TN, and Telford, England. We have a strong market position in all markets in which we compete due to product, geographic, customer diversity and our ability to deliver superior products while operating as a low cost provider.  As a result, we are now the leading producer of bimetallic wire products in the world and are the market leaders in North America, Europe, North Africa the Middle East, and the People’s Republic of China.  We strive to continue expansion within current and evolving markets, and to create shareholder value by:

 
·
Investing in organic and inorganic growth in both infrastructure-based and fast-growing markets;
 
·
Focusing on expansion within and into new, higher-margin products, applications and markets through investment into new machinery and research and development;
 
·
Continuously improving business processes throughout the Company by focusing on key performance indicators and operational excellence;
 
·
Hiring and developing strategic talent thus improving the effectiveness of our performance management processes; and
 
·
Protecting and enhancing shareholder value of the Fushi Copperweld brand.

To accomplish these goals, we are focused on continuously improving operational efficiency in areas we view to be vital: quality, delivery, cost, and innovation. We also take an opportunistic approach to achieving our goals, and thus, we seek acquisitions of businesses which facilitate overall growth and cash flows of the Company.

Typically using 70% less copper than conventional copper wire, but offering materially the same utility and functionality, our bimetallic wire is used in applications such as distribution products for telecommunication networks, cables for the wireless industry, automotive and consumer products, video and data applications, electrical power cables, wire components for electronic devices, as well as other industrial conductors. In many applications, the value of bimetallic wire is based on advantages other than the economies of bimetallic versus solid copper.  Weight considerations strongly favor CCA because the end user can expect approximately 2.6 times the length with the same weight as solid copper.  Wire is sold by weight but used by length.  The additional length increases the value of CCA. Weight is a major concern in some applications where the end product is portable, such as cell phones, music players, etc. and in automotive applications.  We believe that the use of much lighter bimetallic products will continue to offer opportunities for these applications. Other advantages include RF resistance factor.  RF signals travel over the surface of the wire.  With bimetallic wire, the RF resistance characteristics of the copper cladding offers identical high frequency characteristics as solid copper, but with much less weight and lower end-product stiffness.
 
37


CCS combines the functionality of copper with the strength of steel to provide a higher value, stronger alternative to solid copper for use in coaxial drop cables for cable television, electrical utility applications including ground cables and tracer wire, automotive wiring harnesses, catenary cable for electrified railroads and other applications requiring specific levels of conductivity and higher levels of tensile strength. Copperweld CCS is synonymous with copper-clad steel and is registered as Copperweld®.

Our products are effectively “engineered composite conductors”. We do not produce commodity products and are not subject to the same pricing effects of pure commodity metals. Our customers purchase and use our products for their physical and/or conductive qualities, which have their respective application advantages, with cost savings being an added incentive. While the pricing volatility of our raw materials, especially copper, is a primary cause of cost variations in our products, changes in raw material costs do not materially affect our earnings per share. Although an increase in the price of raw materials may serve to reduce our gross margins as a percentage of net sales, likewise, a decline in raw material prices will increase our gross margin as a percentage of net sales. We generally pass the cost of price changes in our raw materials to our customers rather than the percentage changes. We establish prices for our products based on market factors and our cost to produce our products. Typically, we set a base price for our products for our customers with an understanding that as prices of raw materials change, primarily for copper but also for aluminum and steel, we will pass the change through to our customers. Therefore, when prices of raw material increase, our prices to our customers increase and the amount of our total net sales increases while the dollar amount of our gross margin remains relatively stable.  As a result, the impact on earnings per share from volatile raw material prices is minimal, although there are timing delays of varying lengths depending upon volatility of metals prices, the type of product, competitive conditions and particular customer arrangements.



The above chart demonstrates how changes in the 2008 Comex monthly average copper and aluminum prices can hypothetically affect our margins. The combined cost of copper and aluminum changed from approximately $4.25 at month one to a high of $5.33 in month four and then trended generally down during the remainder of the year to a low of $2.11 in month twelve. In this example, we have a gross margin per pound of $0.50 for illustrative purposes. Passing the changing costs through to our customers’ prices allows us to maintain a level amount of dollar gross margin. Considering gross margin as a percentage of net sales can be misleading when raw materials costs are increasing even though the dollar amount of gross margin remains the same. Although the gross margin would have fluctuated between from 8.6% and 19.2% in our example, the dollar amount of gross margin and resulting net income flowing to earnings per share remained the same.
 
38

 
Factors driving and affecting operations results include raw material prices, product and price competition, economic conditions in various geographic regions, foreign currency exchange rates, interest rates, changes in technology, fluctuations in customer demand, variations in the mix of products, production capacity and utilization, working capital sufficiency, availability of credit and general market liquidity, patent and intellectual property issues, litigation results and legal and regulatory developments, and our ability to accurately forecast sales demand and calibrate manufacturing to such demand, manage volatile raw material costs, develop, manufacture and successfully market new and enhanced products and product lines, control operating costs, and attract, motivate and retain key personnel to manage our operational, financial and management information systems.

Current Business Environment and 2009 Outlook

With respect to the overall business trends in 2009 and forward, management recognizes that the current condition of the global economy may present us with significant challenges to our financial condition and results of operations. Statistics showed that the global economy decelerated quickly and severely in the second half of 2008.  China, a market that has generated most of our revenue and growth, saw its GDP growth in the fourth quarter of 2008 drop to 6.8%, the slowest the country has experienced in seven years. The figure was more than 10% in the first half of 2008, and 13% rate for 2007.  Global economic turmoil, uncertainties in capital markets, currency fluctuations and commodity cost volatility have substantially reduced the visibility for our industry and our business.

However, we think the following macro-level trends will positively impact our business and offer us opportunity to capture new business despite global economic conditions and preserve profitability:

 
·
Continued growth in demand for CCA-based telecommunication products;
 
·
Government stimulus packages focused on infrastructure: high-speed railways, T&D and power grid build out;
 
·
Continued strength of grounding wire market;
 
·
Worldwide underlying long-term growth trends in electric utility and infrastructure markets;
 
·
Continuing demand for cost effective, energy saving alternatives.

In addition to these macro-level trends, the Company is presented with tremendous opportunities brought by the increasing capital expenditures of major telecommunications operators in China subsequent to the restructuring and the recent issuance of 3G licenses. In order to capture the growth opportunities, we will focus on driving profitability by streamlining our organizational structure and business procedures, increasing operational efficiency and optimizing operating processes, while managing production costs and operating expenses.

In addition, we are seeking to continue to develop the high potential utility and electrical appliance markets, to enhance productivity and to expand our sales of higher margin products.  Meanwhile, we are also working to strengthen sales management and customer relations.  We will seek to consolidate our relationships with our best customers, stop or suspend selling to customers that pose significant credit risk, and develop new customers cautiously.  In addition, as part of our ongoing efforts to reduce total operating costs, we continuously improve our ability to efficiently utilize existing and new manufacturing capacity to manage expansion and growth.  Investment in new capacity will pay dividends.  Effectively utilized manufacturing assets, economy of scale generated, will help offset high raw material prices and dilute overhead over time.  Despite worsening economic conditions, we expect to operate our facilities at relatively high combined utilization rates.

We actively seek to identify and promptly respond to key economic and industry trends in order to capitalize on expanding niche markets for our products, and possibly entering into new markets both down and up stream, in order to achieve better returns.  We have the resources, technology, working capital and capacity to meet growing market demands.  Over the long-term, we believe that we are well positioned to benefit from the growth opportunities in China and throughout the world.
 
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Financial Performance Highlights:
Results of Operations

The following table shows, for the periods indicated, information derived from our consolidated statements of income in thousands of dollars and as a percentage of net sales (net sales and expenses for the Fayetteville and Telford (Copperweld) are included for the 2007 fiscal year beginning October 29, 2007 through December 31, 2007). Percentages may not add due to rounding.
 

   
Year Ended December 31,
 
   
2008
   
2007
   
2006
 
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
 
Net Sales
  $ 221,435       100 %   128,222       100 %   $ 67,596       100 %
Cost of Sales
    164,182       74 %     85,774       67 %     42,782       63 %
Gross Profit
    57,253       26 %     42,448       33 %     24,814       37 %
Selling, general and adminstrative expenses
    20,163       9 %     11,803       9 %     4,428       7 %
Operating income
    37,090       17 %     30,645       24 %     20,386       30 %
Income before taxes
    28,970       13 %     26,654       21 %     18,208       27 %
Net income
  $ 28,475       13 %   $ 29,506       23 %   $ 17,810       26 %

Year ended December 31, 2008 compared to year ended December 31, 2007

Net Sales

Net sales were $221.4 million in 2008, compared to $128.2 million in 2007. The 73% increase in sales in the fiscal year ended December, 2008 was primarily attributable to the full year inclusion of the Copperweld acquisition and an increase in sales from our Dalian facility. Substantially all organic growth was due to increases in sales volumes.
 
The following table breaks down application categories as percentage of total sales.

   
FY2008
   
FY 2007*
 
   
sales
(millions
USD)
   
% of total sales
   
sales
(millions
USD)
   
% of total sales
 
Telecom
  $ 112.6       50.9 %   $ 110.6       60.1 %
Utility
    97.4       44.0 %     61.4       33.4 %
Auto
    3.8       1.7 %     5.8       3.2 %
Other
    7.6       3.4 %     6.2       3.4 %
    Total
  $ 221.4       100.0 %   $ 184.0       100.0 %
*Fiscal year 2007 sales are shown on a pro forma basis assuming that sales from Fayetteville and Telford were included for the full fiscal year for illustrative purposes.
 
40

 

The following table breaks down sales by categories for both Dalian and Fayetteville for the year ended December 31, 2008 and 2007. Telford’s production is reflected in Fayetteville’s production.
 
   
FY2008
   
FY 2007*
 
   
Dalian
   
Fayetteville
   
Dalian
   
Fayetteville
 
   
sales
(tons)
   
% of 
total
sales
   
sales
(tons)
   
% of 
total
sales
   
sales
(tons)
   
% of
total
sales
   
sales
(tons)
   
% of 
total
sales
 
                                                 
Telecom
    13,918       53 %     4,631       42.0 %     12,928       66.6 %     7,564       56.9 %
Utility
    11,674       44 %     4,304       39 %     6,139       31.6 %     2,560       19.3 %
Automotive
    -       -       532       4.8 %     -       -       2,593       19.5 %
Other
    669       3 %     1,563       14.2 %     349       1.8 %     579       4.4 %
    Total
    26,261       100.0 %     11,030       100.0 %     19,416       100.0 %     13,296       100.0 %
*Fiscal year 2007 volumes are shown on a pro forma basis assuming that sales from Fayetteville and Telford were included for the full fiscal year for illustrative purposes.

The following table summarizes installed capacities and outputs by product type for both Dalian and Fayetteville for the year ended December 31, 2008. Telford’s production is reflected in Fayetteville’s numbers.

   
Dalian
   
Fayetteville
 
   
Installed Capacity
   
Output
   
Installed Capacity
   
Output
 
Product line
 
(Metric Tons)
   
(Metric Tons)
   
(Metric Tons)
   
(Metric Tons)
 
CCA
    34,000       25,358       12,400       2,771  
CCS
    800       25       16,300       7,896  

Capacity in Transit:  CCA 6,000 M Tons and CCS 8,200 M Tons

At December 31, 2008, we had combined production capacity for CCA of 46,400 metric tons and CCS capacity of 17,100 metric tons. We had an additional 6,000 metric tons of CCA capacity and 4,100 metric tons of CCS capacity in transit to Dalian. We expect to have the additional CCA capacity installed in Dalian by the end of second quarter 2009 and the CCS capacity installed in the third quarter 2009. We also expect to install a further 4,100 metric tons of CCs at our Fayetteville facility over the course of 2009. The average price of CCA produced in Dalian and sold primarily in the PRC was $6,188 per ton while the average price of CCA produced in Fayetteville was $6,654 per ton. CCS produced in Fayetteville sold for an average of $5,086 during 2008. Both Dalian and Fayetteville sell a variety of CCA products and the price for each variety may vary based on the amount of manufacturing required and the ratio of copper to aluminum. Dalian did not sell a significant amount of CCS during 2008. The average selling price of CCS sold by Fayetteville varies by product type primarily based on the amount of copper (conductivity) in the product and the amount of manufacturing required. Sales referred to as Fayetteville include the sales from Telford also.

Customers

We significantly expanded and diversified our customer base in 2008 both through our acquisition of Copperweld and through organic growth. Our five largest customers accounted for 18.2% of total sales in 2008, down from 24.6% in 2007 and 29% in 2006. (Copperweld’s sales for the full year of 2007 are included for comparison purposes.) Furthermore, our ten largest customers in 2008 accounted for only 29.6% of net sales, down from 37.8% in 2007 on a pro forma basis including full year sales for Fayetteville facility. We believe this increased diversification significantly limits our market risk and gives us a stronger base on which to expand. We further believe our overall customer composition and the concentration of our top customers will change as we expand our business and seek to shift our product sales portfolio to higher margin products. We are continuing to expand and consolidate the direction of our combined sales and marketing group in order to focus our resources towards diversification of our customer base, product mix and geographic presence to mitigate customer concentration risk. Our objective is to focus on expanding our existing business relationships by offering a wider range of products and building new sales relationships throughout the world with our expanded sales organization.
 
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The following table sets forth our ten largest customers in fiscal 2008:
 
Originating Office
 
2008 Sales in USD
   
Percentage of Total Sales
 
Dalian
      10,077,574       4.55 %
Fayetteville
      8,682,315       3.92 %
Fayetteville
      8,545,835       3.86 %
Dalian
      6,713,586       3.03 %
Dalian
      6,270,735       2.83 %
Dalian
      6,133,967       2.77 %
Dalian
      5,275,169       2.38 %
Fayetteville
      4,858,052       2.19 %
Dalian
      4,784,115       2.16 %
Dalian
      4,294,241       1.94 %
   Total
      65,635,589       29.63 %

Our manufacturing activities are determined and scheduled upon both firm orders and projected sales information gathered by our sales personnel from direct contact with our customers. Customers typically submit purchase orders seven to thirty days prior to the requested delivery date. However, depending on the product and the available equipment run schedules, the lead time can be as short as three days. The sales price is determined at the time of purchase based on a formula or a unit price for each product. In either case, the purchase price is a function of the market price of our raw materials at the time of purchase, subject to adjustment at the time of delivery. For some customers, we adjust our prices based on the average cost of raw materials for the previous month.

Geographically, a substantial portion of our customers served by our Dalian sales force is based in the PRC. Some of our customers are US based corporations that have established subsidiaries operating inside the PRC. Several of these corporations were former customers of our Fayetteville facility but now place orders through their subsidiaries located in the PRC. We categorize these orders as domestic orders. On the other hand, most of our customers served by our Fayetteville and Telford based sales group are located in the Americas, Europe, Africa, Asia, excluding the PRC and the Middle East.  We are transferring all of our Asian customers to our PRC based sales group in order to provide more efficient customer service. As a result, we anticipate that most of our net sales will continue to be derived from sales to our Asian customers. Combined, we expect our sales growth to continue worldwide because of our working capital base, our combined sales force, our production capacity and our commitment to innovative research and development of our existing products and for developing new products.

Cost of Goods Sold

Cost of goods sold increased to $164.2 million in 2008, from $85.8 million in 2007. As measured by percentage of net sales, our cost of goods sold was 74.1% in 2008 compared with 66.9% in 2007. Cost of goods sold principally consists of the cost of raw materials, labor, utilities, manufacturing costs, manufacturing related depreciation, machinery maintenance costs, purchasing and receiving costs, inspection costs, shipping and handling costs, and other fixed costs associated with the manufacturing process. The increase in Cost of Goods Sold as a percentage of net sales was principally due to the acquisition of Copperweld in October 2007, which has labor and overhead costs that historically have been greater than our legacy operations in Dalian. 

Raw material costs accounted for 84.8% of total costs in 2008. Copper composed 55.6% of our raw material costs, aluminum 38.7% and steel 5.7%. Other variable costs included manufacturing labor, maintenance, shipping and handling, and utility expenses. Depreciation and overhead costs as a percentage of COGS were 7.4% in 2008. The manufacturing related depreciation for 2008 was $4,843,153.

Suppliers

In Dalian we have historically relied on two key suppliers for the procurement of copper strip and aluminum. These two suppliers combined to account for approximately 37% of our total raw material purchases for the fiscal years to 2008. Our strategically located facilities worldwide provide us with the opportunity to pursue global sourcing and we plan to increase the number of raw material suppliers further spreading our supply risk over a larger number of suppliers. We will continue our strategy of expanding our sources of supply to overcome supply and price issues that can develop with only one or two suppliers, particularly for copper.
 
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The following table sets forth our ten largest raw material suppliers for fiscal 2008:

Ten Largest Raw
Material Suppliers 2008
 
Purchases
in USD
   
% of Raw Material
Purchases
 
Copper—Dalian
    34,758,156       25.2 %
Aluminum—Dalian
    16,172,714       11.8 %
Aluminum—Dalian
    14,987,557       10.9 %
Copper—Dalian
    14,087,237       10.3 %
Aluminum—Dalian
    9,092,174       6.6 %
Copper—Fayetteville
    7,177,355       5.2 %
Aluminum—Fayetteville
    5,251,721       3.8 %
Copper—Fayetteville
    5,191,525       3.8 %
Steel—Fayetteville
    4,204,542       3.1 %
SteelFayetteville
    3,802,794       2.8 %
Total—Top Ten
    114,725,775       83.5 %

Gross margin

Gross profit was $57.3 million in 2008, increased 34.9% from approximately $42.4 million in 2007. As a percentage of net sales, gross profit decreased from 33.1% to 25.9%. This was primarily due to the lower margins contributed by the Fayetteville and Telford facilities acquired in October 2007, as well as a slight decline in gross margins in Dalian.

Selling, General and Administrative Expenses
 
Selling expenses, which principally includes sales related staff salary and benefits, travel expenses, and sales commissions, were $4.6 million in 2008, compared to $1.8 in 2007, a 161.4% increase. This increase is primarily due to the inclusion of a full year of Fayetteville and Telford salaries, as well as a ramp up in sales efforts to penetrate new markets and industries. As a percentage of net sales, selling expenses increased by 0.7% in 2008 compared to 2007. General and administrative expenses, as a percentage of net sales, decreased to 7% of net sales in 2008, compared to 7.8% in 2007. The decrease is primarily due to benefits realized from integrating our global sales team following the acquisition of Copperweld in October 2007 and economies of scale resulting from increased revenues.  On a dollar for dollar basis, general and administrative expenses increased to $15.6 million in 2008 compared to $10.0 million in 2007.  As with selling expenses, the increase in gross amount of general and administrative expenses primarily is attributed to a full year of expenses associated with the acquisition of Copperweld in October 2007.
 
Interest Expense

Interest expense increased to $8.8 million in 2008 from $7.5 million in 2007, while as a percentage of net sales, interest expense decreased to 4% in 2008 from 5.9% in 2007. This increase is primarily the result of interest on the $40 million High Yield notes and amortized loan commission, interest accrual and amortization of costs relating to the Kuhns Brothers litigation, as well as inclusion of the Dalian working capital line and increases in Dalian’s short term bank loans.
 
Taxation

U.S. income tax

Fushi Copperweld, Inc. (formerly Fushi International, Inc.) is a company incorporated in the State of Nevada, Fushi Holdings is a company incorporated in the State of Delaware, Copperweld Bimetallics, LLC is chartered in the State of Delaware and Copperweld UK, LLC is registered in the United Kingdom. Prior to the acquisition of Copperweld, we conducted substantially all our operations through our PRC operating subsidiaries. With the acquisition of Copperweld, we have a manufacturing facility and administrative offices located in Fayetteville, Tennessee, USA and in Telford, England, UK.
 
43

 
We are subject to United States taxation; however, we do not anticipate incurring significant United States income tax liability during fiscal year 2009 due to the following factors:

- We anticipate that Copperweld has sufficient tax loss carry forwards to offset any taxable income earned during the coming years.

- Earnings generated from our non-U.S. operating companies are generally eligible for a deferral from United States taxation until such earnings are repatriated to the United States, and
 
- We believe that we will not generate any significant amount of income inclusions under the income imputation rules applicable to a United States company that owns "controlled foreign corporations" for United States federal income tax purposes.
 
Therefore, no provision for U.S. federal income taxes or tax benefits on the undistributed earnings and/or losses of our company has been made.
 
P.R.C. enterprise income tax
 
In the fiscal year ended December 31, 2008, our business operations were principally conducted by our subsidiaries incorporated in the PRC. PRC enterprise income tax is calculated based on taxable income determined under PRC accounting principles. In accordance with “Income Tax Law of China for Enterprises with Foreign Investment and Foreign Enterprises,” or the Income Tax Law, “Foreign Invested Enterprises”, or FIEs, established in the PRC are generally subject to an “Enterprise Income Tax”, or EIT, rate of 33%. PRC domestic companies are governed by the Enterprise Income Tax Laws of the PRC and are also generally subject to an EIT rate of 33%. However, the Income Tax Laws provide certain favorable tax treatment to a company that qualifies as a "New or High-technology Enterprise" or a “Foreign Invested Enterprise” located in the old town of an inshore open city. Additionally, the governments at the provincial, municipal and local levels can provide many tax incentives and abatements based on a number of programs at each level.
 
The Dalian Municipal Government issued a notice in 2000 providing for a series of tax preferential treatments to companies that qualify as "New or High-tech Enterprise” or companies that are registered and operate in a specified development zone in Dalian City.

Dalian Fushi, a 100% variable interest, non-operating subsidiary, was incorporated in the PRC and is subject to PRC income tax which is computed according to the relevant laws and regulations in the PRC. Dalian Fushi's bimetallic composite conductor wire product was approved by Dalian Cit as a "high-tech" project. As a result, Dalian Fushi is a business entity that is qualified as a "new or high-technology enterprise," and is entitled to a two-year full exemption from the PRC enterprise income tax starting from its first year of operation, which expired on December 31, 2003, followed by a 50% reduction and other favorable tax treatment for the succeeding three years, which expired on December 31, 2006. The provision for income taxes for the twelve months ended December 31, 2008 was zero as we didn’t have any operation under Dalian Fushi from the beginning of 2007.

Fushi International (Dalian) (“FID”), a wholly owned subsidiary of Fushi Holdings, Inc., was incorporated in the PRC as an FIE and is subject to PRC income tax which is computed according to the relevant laws and regulations in the PRC. FID has located its factories in a special economic region in Dalian and is granted certain preferential treatments including a corporate income tax rate of 24%. In September 2005, FID was approved as a wholly foreign owned enterprise. This economic region allows FID a two-year income tax exemption for the years ended December 31, 2006 and 2007, and a 50% income tax reduction for the following three years ended December 31, 2008, 2009, and 2010.

Effective January 1, 2008, the new EIT Law in PRC imposes a unified income tax rate of 25.0% on all domestic-invested enterprises and FIEs, such as our PRC operating subsidiaries, unless they qualify under certain limited exceptions. But the EIT Law permits companies to continue to enjoy their existing preferential tax treatments until such treatments expire in accordance with their current terms. Any increase in our effective tax rate as a result of the above may adversely affect our operating results 
 
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Net Income

Pre-tax income increased 17.5% to $31.3 million from $26.6 million, excluding litigation accrual expense.  Net income decreased to approximately $28.5 million, or 13% of net sales for the year ended December 31, 2008, from approximately $29.5 million, or 23% of net sales for the year ended December 31, 2007, representing a decrease of $1.03 million or 3.5%. The bottom line decrease is primarily due to a 7.2% decline in gross margin, slight increase in other expense and increase in the provision for income tax.    As more fully described in the section “Taxation” above, we became liable for PRC income taxes on our Dalian operations during 2008.

Basic and diluted earnings per share (EPS) for the fiscal year ended December 31, 2008 were $1.04 and $1.00, compared to $1.33 and $1.19 for the prior year.  The weighted average number of shares outstanding to calculate basic EPS was 27.3 million and 22.2 million for 2008 and 2007, respectively.  The weighted average number of shares outstanding to calculate diluted EPS was 28.3 million and 25.2 million for 2008 and 2007, respectively.

Foreign Currency Translation Gains
 

In the year ended December 31, 2008, the RMB steadily rose against the US dollar for the first and second quarter’s months and then partially stabilized for the third and fourth quarters. As a result of the appreciation of the RMB, we recognized a foreign currency translation gain of $12.5 million. Given the uncertainty of exchange rate fluctuations, we cannot estimate the effect of these fluctuations on our future business, product pricing, and results of operations or financial condition. See “Risk Factors- Risks Related to Doing Business in the PRC. - The fluctuation of the Renminbi may materially and adversely affect your investment.”
 
Prior to acquiring Copperweld in October 2007, materially all of our revenues and a majority of our expenses were denominated in RMB Yuan.  For our operations in the PRC, the income statement accounts and balance sheet amounts with the exception of equity at December 31, 2008 were translated at 1 RMB Yuan to 0.14657 USD, or 1 USD to 6.8225 RMB Yuan. The equity accounts were stated at their historical rate.

Year ended December 31, 2007 compared to year ended December 31, 2006
 
Revenues

Net sales were $128.2 million in 2007 including sales from Fayetteville and Telford facilities for the period October 29 through the end of the period, compared to $67.6 million in 2006. Of the 89.7% sales growth in the fiscal year ended December 31, 2007, 74.8% was due to organic growth and 14.8% was attributable to sales from Fayetteville and Telford for November and December of 2007. The 74.8% organic growth was primarily driven by a 7.4% increase in the average selling price of product sold and 62.6% increase in the volume of bimetallic products sold. The increase in average selling price in 2007 was primarily due to the increase in raw material prices, particularly copper prices, and the increased sales volume primarily reflects expanded production capacity as a result of our capital investment.
 
45

.
Customers

We significantly expanded and diversified our customer base in 2007 both through our acquisition of Copperweld and through organic growth. Our five largest customers accounted for 24.6% of total sales in 2007, down from 29% in 2006 and 41% in 2005. Our largest customer accounted for 10.8% of sales in 2007. In fact, our ten largest customers in 2007 accounted for only 37.75% of net sales, on a pro forma basis including full year sales for Fayetteville facility. We believe this increased diversification significantly limits our market risk and gives us a stronger base on which to expand. We further believe our overall customer composition and the concentration of our top customers will change as we expand our business and seek to shift our product sales portfolio to higher margin products. However, the loss of, or significant reduction in orders from any of our largest customers may have a material adverse impact on our financial condition and operating results. We are continuing to expand and consolidate the direction of our combined sales and marketing group in order to focus our resources towards diversification of our customer base, product mix and geographic presence to mitigate customer concentration risk. Our objective is to focus on expanding our existing business relationships by offering a wider range of products and building new sales relationships throughout the world with our expanded sales organization.

The following table (which considers Fayetteville’s sales for the full year of 2007) sets forth our ten largest customers in fiscal 2007:

Originating Office
 
2007 Sales in
USD
   
Percentage of
Total Sales
 
Fayetteville
    21,215,885       10.80 %
Dalian
    8,027,451       4.09 %
Dalian
    6,798,765       3.46 %
Fayetteville
    6,638,111       3.38 %
Dalian
    5,636,408       2.87 %
Dalian
    5,518,656       2.81 %
Dalian
    5,476,410       2.79 %
Dalian
    5,222,391       2.66 %
Dalian
    4,977,456       2.53 %
Dalian
    4,624,811       2.35 %
  Total
    74,136,344       37.74 %
  
Cost of Goods Sold

Cost of goods sold increased to $85.8 million in 2007, from $42.8 million in 2006. As measured by percentage of net sales, our cost of goods sold was 66.9% in 2007 compared with 63.3% in 2006. Cost of goods sold principally consists of the cost of raw materials, labor, utilities, manufacturing costs, manufacturing related depreciation, machinery maintenance costs, purchasing and receiving costs, inspection costs, shipping and handling costs, and other fixed costs associated with the manufacturing process. The increase in Cost of Goods Sold as a percentage of net sales was principally due to the cost of adding capacity in Dalian and labor and overhead costs in Fayetteville that historically have been greater than in Dalian. 
 
46


Suppliers

We also significantly diversified our sources of supply. In Dalian we have historically relied on two key suppliers for the procurement of copper strip and aluminum. These two suppliers combined to account for approximately 41% of our total raw material purchases during the fiscal years prior to 2007. During 2007, four suppliers provided 43.0% of our raw material for us.  With the addition of Fayetteville and Telford, we will increase the number of raw material suppliers further spreading our supply risk over a larger number of suppliers. We will continue our strategy of expanding our sources of supply to overcome supply and price issues that can develop with only one or two suppliers, particularly for copper.

The following table sets forth our ten largest raw material suppliers for fiscal 2007:

Ten Largest Raw
Material Suppliers 2007
 
Purchases
in USD
   
% of Raw Material
Purchases
 
Copper—Dalian
    26,122,785       12.5 %
Aluminum—Dalian
    13,462,792       11.0 %
Aluminum—Dalian
    13,220,800       10.8 %
Copper—Dalian
    10,895,561       8.9 %
Aluminum—Dalian
    10,334,099       8.4 %
Copper—Fayetteville
    9,222,531       7.5 %
Aluminum—Fayetteville
    7,693,142       6.3 %
Copper—Fayetteville
    5,894,133       4.8 %
Copper—Fayetteville
    4,758,723       3.9 %
Steel—Fayetteville
    4,274,291       3.5 %
Total—Top Ten
    105,878,857       77.6 %
The information in the preceding chart includes Fayetteville’s purchases for the full year of 2007.

Gross margin

Gross profit was $42.4 million in 2007, increased 71.1% from approximately $24.8 million in 2006. As a percentage of net sales, gross profit decreased from 36.7% to 33.1%. This was primarily driven by higher raw material costs that affected the selling price but not the dollar amount of margin. As we discussed in the overview, we pass increases in raw material costs to our customers rather than the percentage changes in our raw material costs. Therefore, when raw material increases are passed through to our customers, the sales price will increase and the net margin as a percentage of net sales will decline. However, the dollar amount of gross margin remains stable.
 
Selling, General and Administrative Expenses
 
Selling expenses, which principally include sales related staff salary and benefits, travel expenses, and sales commissions, were $1.8 million in 2007, compared to $613,119 in 2006, a 187.5% increase. As a percentage of net sales, selling expenses increased by 0.47% in 2007 compared to 2006. General and administrative expenses, as a percentage of net sales, increased to 7.8% of net sales in 2007, compared to 5.6% in 2006. The increase was primarily due to increased depreciation associated with expanded asset base amounting to $2.2 million, $1.9 million share based compensation, $1.6 million professional fee and costs associated with expanding our staff in Dalian to accommodate the increasing demand for our products and the inclusion of Copperweld operating expenses for the period October 29, 2007 through December 31, 2007.
 
Interest Expense

Interest expense increased to $7.5 million in 2007 from $1.07 million in 2006, while as a percentage of net sales, interest expense increased to 5.9% in 2007 from 1.6% in 2006. We issued $40 million in HY notes and $20 million in convertible notes that were purchased by Citadel Equity Fund Ltd. on January 24, 2007. Interest expense related to those notes during 2007 was approximately $5.2 million.
 
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Taxation

Income tax

Fushi Copperweld, Inc. (formerly Fushi International, Inc.) is a company incorporated in the State of Nevada, Fushi Holdings is a company incorporated in the State of Delaware, Copperweld Bimetallics, LLC is chartered in the State of Delaware and Copperweld UK, LLC is registered in the United Kingdom. Prior to the acquisition of Copperweld, we conducted substantially all our operations through our PRC operating subsidiaries. With the acquisition of Copperweld, we have a manufacturing facility and administrative offices located in Fayetteville, Tennessee, USA and in Telford, England, UK.

P.R.C. enterprise income tax
 
In the fiscal year ended December 31, 2007, our business operations were principally conducted by our subsidiaries incorporated in the PRC. PRC enterprise income tax is calculated based on taxable income determined under PRC accounting principles. In accordance with “Income Tax Law of China for Enterprises with Foreign Investment and Foreign Enterprises,” or the Income Tax Law, “Foreign Invested Enterprises”, or FIEs, established in the PRC are generally subject to an “Enterprise Income Tax”, or EIT, rate of 33%. PRC domestic companies are governed by the Enterprise Income Tax Laws of the PRC and are also generally subject to an EIT rate of 33%. However, the Income Tax Laws provide certain favorable tax treatment to a company that qualifies as a "New or High-technology Enterprise" or a “Foreign Invested Enterprise” located in the old town of an inshore open city. Additionally, the governments at the provincial, municipal and local levels can provide many tax incentives and abatements based on a number of programs at each level.
 
The Dalian Municipal Government issued a notice in 2000 providing for a series of tax preferential treatments to companies that qualify as "New or High-tech Enterprise” or companies that are registered and operate in a specified development zone in Dalian City.

Dalian Fushi, a 100% variable interest, non-operating subsidiary, was incorporated in the PRC and is subject to PRC income tax which is computed according to the relevant laws and regulations in the PRC. Dalian Fushi's bimetallic composite conductor wire product was approved by Dalian Cit as a "high-tech" project. As a result, Dalian Fushi is a business entity that is qualified as a "new or high-technology enterprise," and is entitled to a two-year full exemption from the PRC enterprise income tax starting from its first year of operation, which expired on December 31, 2003, followed by a 50% reduction and other favorable tax treatment for the succeeding three years, which expires on December 31, 2006. The provision for income taxes for the twelve months ended December 31 was zero as we didn’t have any operation under Dalian Fushi from the beginning of 2007.

Fushi International (Dalian) (“FID”), a wholly owned subsidiary of Fushi Holdings, Inc., was incorporated in the PRC as an FIE and is subject to PRC income tax which is computed according to the relevant laws and regulations in the PRC. FID has located its factories in a special economic region in Dalian and is granted certain preferential treatments including a corporate income tax rate of 24%. In September 2005, FID was approved as a wholly foreign owned enterprise. This economic region allows FID a two-year income tax exemption for the years ended December 31, 2006 and 2007, and a 50% income tax reduction for the following three years ended December 31, 2008, 2009, and 2010.

Effective January 1, 2008, the new EIT Law in PRC imposes a unified income tax rate of 25.0% on all domestic-invested enterprises and FIEs, such as our PRC operating subsidiaries, unless they qualify under certain limited exceptions. But the EIT Law permits companies to continue to enjoy their existing preferential tax treatments until such treatments expire in accordance with their current terms. Any increase in our effective tax rate as a result of the above may adversely affect our operating results 

Net Income

Net income increased to approximately $29.5 million, or 23.0% of net sales for the year ended December 31, 2007, from approximately $17.8 million, or 26.4% of net sales for the year ended December 31, 2006, representing an increase of $11.7 million or 65.7% with a net margin of 26%. The bottom line increase is primarily due to substantial revenue increases while the decrease as a percentage of the net sales was primarily due to lower gross margin and higher SG&A.
 
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Basic and diluted earnings per share (EPS) for the fiscal year ended December 31, 2007 were $1.33 and $1.19, compared to $0.89 and $0.84 for the prior year.  The weighted average number of shares outstanding to calculate basic EPS was 22.2 million and 19.9 million for 2007 and 2006, respectively.  The weighted average number of shares outstanding to calculate diluted EPS was 25.2 million and 21.3 million for 2007 and 2006, respectively.

Foreign Currency Translation Gains

 
In the year ended December 31, 2007, the RMB steadily rose against the US dollar. As a result of the appreciation of the RMB, we recognized a foreign currency translation gain of $9.9 million. Given the uncertainty of exchange rate fluctuations, we cannot estimate the effect of these fluctuations on our future business, product pricing, and results of operations or financial condition. See “Risk Factors- Risks Related to Doing Business in the PRC. - The fluctuation of the Renminbi may materially and adversely affect your investment.”
 
Prior to acquiring Copperweld, materially all of our revenues and a majority of our expenses in 2007 were denominated in RMB Yuan.  For our operations in the PRC, the income statement accounts and balance sheet amounts with the exception of equity at December 31, 2007 were translated at 1 RMB Yuan to 0.1371 USD, or 1 USD to 7.2941 RMB Yuan. The equity accounts were stated at their historical rate.

LIQUIDITY AND CAPITAL RESOURCES

We have historically financed our operations and capital expenditures principally through private placements of debt and equity offerings, bank loans, and cash provided by operations.  Significant factors affecting our cash liquidity include (1) cash provided by operating activities, (2) cash used for capital expenditures, and (3) our available credit facilities and other borrowing arrangements.
 
As is customary in the industry, we provide payment terms to most of our customers that exceed terms that we receive from our suppliers. Therefore, the Company’s liquidity needs have generally consisted of working capital necessary to finance receivables and raw material inventory. Capital expenditures have historically been necessary to expand the production capacity of the Company’s manufacturing operations.

In summary, our cash flows were:

   
December 31, 2008
   
December 31, 2007
 
Net cash (used in) provided by operating activities
  $ (368,212 )   $ 26,152,846  
Net cash (used in) investing activities
    (17,089,985 )     (51,182,872 )
Net cash (used in) provided by financing activities
    (1,666,360 )     80,257,602  
Effect of exchange rate on cash and cash equivalents
    4,821,569       4,193,631  
Cash and cash equivalents at beginning
    79,914,758       20,493,551  
Cash and cash equivalents at ending
  $ 65,611,770     $ 79,914,758  
 
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For the fiscal year ended December 31, 2008, net cash used by operating activities was $368,212. This was primarily attributable to our net income of $28.5 million, $33.4 million increase in working capital from $7.9 million in 2007 to $41.3 million in 2008, adjusted by an add-back of non-cash expenses mainly consisting of depreciation and amortization of $ 9.7 million and share-based compensation expense of $1.9 million. The change in working capital for the year ended December 31, 2008 was primarily related to i) a $24.8 million increase in accounts receivable; ii) a $17.4 million increase in advance to raw material suppliers, partially offset by $5.1 million decrease in inventory; iii) a $5.0 million increase in deferred tax assets and a $1.8 million decrease in taxes payable; iv) a $1.1 million decrease in other payables and accrued liabilities, partially offset by a $4.1 million increase in accounts payables.  Increase in accounts receivables was primarily driven by revenue growth, and extended credit term to certain customers as well as longer collection cycle as a result of challenging economic condition.  We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Allowance for doubtful accounts is based on our assessment of the collectability of specific customer accounts, the aging of accounts receivable, our history of bad debts, and the general condition of the industry. We have not experienced any significant amount of bad debt since the inception of our operation and have established appropriate procedures to facilitate collection.  Increase in advance to raw material suppliers was due to significant purchase commitments of copper supplies incurred towards the end of the third quarter and the purchase commitments were subsequently renegotiated and amended with the suppliers to reflect prevailing market price for future delivery.

For the fiscal year ended December 31, 2008, net cash used in investing activities was $17.1 million, and was primarily attributable to i) a $1.7 million purchase of land use rights; ii) a $15.2 million capital expenditure on improvement of property and purchase of new equipment and machinery, and (iii) a $3.1 million advances for purchase of equipment

For the fiscal year ended December 31, 2008, net cash used in financing activities was $1.7million as a result of repayment of maturing, long term and short term working capital loan in the amount of $17.3 million and payment in the amount of $2.4 million on our existing credit line facilities, partially offset by proceeds from short term borrowing of $16.9 million. As of December 31, 2008, we had outstanding short-term working capital loans with banks in an aggregate amount of $17.6 million with terms ranging from three months to one year and maturity dates ranging from February to March, 2009.  The weighted average annual interest rate on the loan was 8.96%

Our Fayetteville facility (Copperweld) maintains a revolving line of credit with Wells Fargo Bank.  Availability on the credit line is the lower of $12.8 million or the collateral balances.  The outstanding balance was $4,712,075 at December 31, 2008. The Company deposits the cash collections from its customers against the outstanding account balance of the line of credit on a daily basis. The line of credit matures in 2010.  If we are unable to renew or replace our Fayetteville revolving line of credit, our Fayetteville results of operations would be adversely affected.  See “Risk Factors – Risks Related to Our Business – Our Fayetteville, Tennessee operation is dependent upon a line of credit to fund working capital needs and, if we are unable to renew or replace the line of credit, our Fayetteville results of operations would be adversely affected.”  Our Telford facility (Copperweld UK) maintains a revolving line of credit with a limit of approximately $1,096,000 (or ₤750,000) but had no balance outstanding at December 31, 2008.  Both lines of credit expire in 2010.

As of December 31, 2008, we had cash and cash equivalents of $65.6 million, down $14.3 million from $79.9 million at December 31, 2007.
 
On January 24, 2007, we and Citadel Equity Fund Ltd. ("Citadel") entered a Notes Purchase Agreement (the “Notes Purchase Agreement”) pursuant to indicative financing term sheets dated December 19, 2006. Pursuant to the terms of the Notes Purchase Agreement, the Company offered and sold and Citadel purchased (a) $40,000,000 of the Company’s Guaranteed Senior Secured Floating Rate Notes due 2012 (the “HY Notes”) and (b) $20,000,000 of the Company’s 3.0% Senior Secured Convertible Notes due 2012 (the “Convertible Notes” and collectively with the HY Notes, the "Notes").  The details of the indentures are available in previous filing.  The indenture for the Convertible Notes, among other provisions, allows the holder to convert the debt to common stock at a conversion rate of $7.00 for each share.  On January 8, 2008, Citadel converted $15.0 million in debt to 2,142,857 shares of our common stock.
 
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The HY Notes and Convertible Notes contain customary affirmative and negative covenants and other provisions, including restrictions on the incurrence of additional debt, creation of liens, making restricted payments, paying dividends, maintenance of a maximum leverage ratio, maintenance of a minimum fixed charge coverage ratio, and minimum net worth.  We were in compliance with all of these requirements as of December 31, 2008.
 
Under the terms of the Indentures governing the Notes, we are required to make payments of interest on the Notes on the same day such payments are due and payable.  We have experienced payment delays in January 2009 due to recent tightening of SAFE restrictions on the conversion of RMB to USD. We have since paid the interest amounts in full and have no current issues with respect to payment. 

If there is a default, or we do not maintain certain financial covenants or we do not maintain borrowing availability in excess of certain pre-determined levels, we may be unable to incur additional indebtedness, make restricted payments or redeem or repurchase our capital stock. To the extent the Noteholders demand accelerated payment of maturity in entire or partial principal of the Notes as a result of declared default, our liquidity will be adversely affected.  Without sufficient liquidity to fund our debt obligations, we may be forced to curtail our operations, including reducing or depleting our working capital, reducing or delaying capital expenditures, and limiting out ability to obtain additional financing for future working capital, capital expenditures, acquisitions and other business opportunities we want to pursue.  Especially given the current adverse economic condition and the extreme volatility, disruption and dislocation the capital and credit markets have been experiencing in recent months, there can be no assurance that our ability to utilize our current credit facilities or our ability to access credit and capital markets and finance our operations will not be impaired. (See risk factors related to business referencing foreign exchange control and Fayetteville, and risks related to notes.)

In addition, if we are unable to stay enforcement of the judgment in the Kuhns litigation pending our appeal, we will be forced to pay the approximately $7 million judgment immediately. Any payment of the judgment would have a material adverse effect on our liquidity. See “Item 3. Legal Proceedings.”

We believe that our current cash flow and capital resources will be sufficient to meet our anticipated cash needs, including our cash needs for working capital, capital expenditures, and our other short-term operating strategies for the next 12 months. We may, however, require additional cash resources due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue.  Customer demand, competitive market forces, commodities pricing, customer acceptance of our product mix and economic conditions worldwide could affect our ability to continue to fund our future needs from business operations.
 
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Management's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The Company's financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See note 1 to the Company's consolidated financial statements, "Summary of Significant Accounting Policies and Organization". Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company believes that the following reflect the more critical accounting policies that currently